The Australian Prudential Regulation Authority (APRA) has released an updated version of Prudential Standard APS 210 Liquidity (APS 210).

Amongst other things, APS 210 provides for the introduction in Australia of the Liquidity Coverage Ratio (LCR), a key component of the Basel III package of reforms designed to improve the banking system’s resilience to periods of financial market stress. The LCR comes into force from 1 January 2015.

The Basel III liquidity reforms involve two new quantitative measures: a 30-day Liquidity Coverage Ratio (LCR) to address an acute stress scenario and a Net Stable Funding Ratio (NSFR) to encourage longer-term funding resilience.

Term deposits

To meet the Basel III liquidity standards, a term depositor must have no legal right to withdraw deposits within the 30-day period to which the Liquidity Coverage Ratio applies (subject to the hardship exemption).

Cash outflows related to fixed or term deposits with a residual maturity or withdrawal notice period of greater than 30 days will be excluded from LCR calculations if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR, or if early withdrawal results in a significant penalty that is materially greater than the loss of interest.

If an ADI allows a depositor to withdraw such deposits despite a clause that says the depositor has no legal right to withdraw, the entire category of these funds must be treated as demand deposits.

The definition of basic deposit product in section 761A of the Corporations Act does not specify the period of notice that an ADI may require a depositor to give in order to make an early withdrawal from a term deposit of up to two years (except for the special provision for mutuals contained in reg 7.1.03A of the Corporations Regulations 2001).