Perspectives on APRA's proposed changes to ADI liquidity and capital standards

In response to the proposed changes, Grant Thornton Australia has made a submission aimed at improving the proposed liquidity and capital standards as part of the consultation, which closed on 16 February 2024. Drawing on insights from our Financial Services experts, perspectives from our clients and market trends, our contribution shared actionable insights and suggested approaches to mitigate potential unintended consequences of the proposed changes.

Considering potential challenges created by some of the proposed changes to the Minimum Liquidity Holdings (MLH) regime, particularly for small to medium-sized mutual banks and credit unions, we put forward the following key recommendations and considerations in our submission:

• Limited access to funding, management of interest rate risks, potential distortions in competition, and the impact of increased funding costs on profits and customer / member experiences will be challenging to navigate.
• The exclusion of specific assets from the MLH regime is expected to disrupt markets and intensify competition for retail deposits. We suggest that APRA consider market depth, review government support, and examine larger banks' ability to help smaller counterparts access affordable funding to mitigate risk.
• With increasing complexity in managing interest rate risks, due to investments in longer term assets such as government bonds, we encourage APRA to carefully evaluate the proposed changes, ensuring they align with the size and complexity of ADIs.
• Considering the substantial expected impact on profits and customer experiences for MLH ADIs that may arise because of the proposed changes, we encourage APRA to share examples of strategies to support ADIs in addressing them and to clarify the implications before finalising the changes.
• Finally, we highlighted the importance of fair competition through balanced and proportionate industry regulations.

For the proposed changes to be effective for ADIs and aligned with the evolving market landscape, we trust that the submission will assist APRA in assessing and clarifying the challenges outlined. We hope it will enable the implementation of the proposed changes to be smoother, providing MLH ADIs with the necessary time to adapt their operations effectively.

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