Daily Commentary BY THE CURVE TEAM –

Banks to Buy More Government Debt

8th of September, 2020

An expected shift in APRA regulations should see banks buy more government debt.

A portion of banks in Australia are required to hold ‘high quality liquid assets’ (HQLA), which can reliably be converted to cash if needed. Government bonds are considered HQLA.

In 2015, with government debt levels low, the RBA introduced the Committed Liquidity Facility, which allowed banks to own a broader set of assets as their HQLA. Now as state and government debt has begun and is expected to rise, APRA are likely to enforce banks have more federal government and semi-government (state government) as their HQLA.

Already banks have increased their holdings of federal government bonds by 20% since March and semi-government bonds by 50%. This has been required as bank deposits have increased drastically since March, as the RBA and federal government have provided ample liquidity to the system.

The media reports come as the RBA urges the government to spend more with interest rates low. Banks being required to buy government bonds will push interest rates down further.

Yesterday evening, rating agency S&P downgraded AMP’s (including AMP Bank) long-term rating to BBB from BBB+. It cited key employees leaving and their new chair’s openness to selling the company as being impediments to the group’s strategy and business.

Today, the NAB Business Survey for August and payrolls data for the week to August 22 are released. These will be timely updates to gauge the impact the stage 4 lockdowns have had on the economy. We will also release our Monthly Economic Insights, which will look at the state of the economy and the implications of the RBA’s update to the Term Funding Facility on interest rates.

Josh Stewart

Client Relationship Manager