The Reserve Bank of Australia (RBA) has called for superfunds and securities lending industry participants to prepare for a rapid transformation in the way that collateral is, and will be, used globally.

Mark Manning, deputy head of the central bank’s payments policy department addressed Australian delegates at the fourth annual Global Investor/ISF Master Class Australia in Sydney on July 9.

“The large scale regulatory reform agenda that is underway internationally and changes in institutions’ risk preferences, is fundamentally altering the way that liquidity flows through the system.”

The new liquidity standards introduced under the Basel III reforms, which require banks to hold sufficient high-quality liquid assets to be able to withstand 30 days of outflows under stressed market conditions, have already seen a massive increase in the size of liquid assets on the balance sheets of Australian banks.

The amount of liquid assets held by Australian banks has tripled from just over $100bn to more than $300bn in the seven years since late 2006, although the Basel requirements will not be enforced in Australia until next year. The composition of those assets has also shifted, with a move from short-term paper to government securities, which now make up 41 per cent (see table below). 

Manning also cautioned delegates to not assume there would be no global shortage of high-quality collateralised assets. He pointed out that many owners of such assets could be reluctant to make them available for lending programmes, and their effective supply could also be impacted by restrictive regulation.

“While acknowledging the risk considerations, the has argued strongly in international forums that imposing tighter restrictions on collateral rehypothecation and re-use would be counterproductive,” he said.

Manning and the RBA are concerned that these kinds of restrictions have the potential to limit supply of high-quality collateral to the extent that it would not meet demand for these assets.

In response to a question from the floor about the eligibility of equities as collateral with some haircuts, Manning said that equities have not been considered as part of the RBA’s eligibility criteria, although he was certainly aware that they were being used as collateral in some segments of the market.

“High-quality and mostly liquid equities are also envisaged as potentially being eligible under the new Basel Committee and Iosco standards for initial margining of non-centrally cleared derivatives,” he said.