APRA responds to SVB collapse, will bolster small bank liquidity rules

afr.com:

The prudential regulator will bolster liquidity rules for mutual banks and credit unions to better align them with requirements on the major and regional lenders and avoid a Silicon Valley Bank-style collapse creating contagion for the broader financial system.

Eight months after SVB blew up, the Australian Prudential Regulation Authority said on Wednesday it would begin consulting on tougher liquidity rules for smaller banks. The move recognises that the failure of a smaller lender can undermine confidence in the stability of larger banks.

APRA is trying to avoid a similar episode to the SVB collapse in March. Bloomberg

SVB was eviscerated in two days in March, after a run on its deposits triggered by concerns on the plunging value of its bond holdings as interest rates rose, triggering the second-largest banking failure in US history.

APRA said it wanted to ensure smaller Australian lenders value liquid assets on a mark-to-market basis, like larger banks are forced to do, and it would also restrict the types of funding that qualify as being “liquid”.

Bank bills, certificates of deposits and debt securities issued by other banks will no longer be considered eligible liquid assets for smaller banks, the regulator said.

The proposals could increase funding costs, and reduce earnings, for credit unions and mutual lenders, as they are forced to replace the various debt securities with lower-yielding government bonds that do qualify as being liquid, or find alternative funding sources. APRA said it was aware of such impacts and wanted to limit them as it consults the sector over the coming months. Submissions are due with APRA on February 16 next year.

APRA confirmed in a letter sent to all banks on Wednesday that liquidity