Hi TF,
I have scanned through the reference document, but was unable to locate a specific reference to the reserve requirement.
Are you saying there is a reserve requirement (I know Wikipedia isn't always the most reliable source) because this limits the banks ability to monetize debt, or are you saying its irrelevant?
Maybe you could provide a specific quote from your reference?
I'm just trying to get my head around what ANZ are referring to when they state that the cost of funding has increased, because the media just seems to repeat this information to the masses and it becomes a fact without any evidence whatsoever.
Reserve requirements and liquidity coverage are essentially the same thing.
In simplified terms, it is the amount of the funding you raise that you need to keep around the place to meet the requirements of depositors under certain (stressed) circumstances. APRA only set a specific number (min of 9% at item 57 of the paper) for some ADIs; for most of us the amount required is the output of the stress testing scenarios, so it varies by institution.
APRA have a good hard look at your liquidity management on an ongoing basis and if they don't like what they see can simply give you a number.
It's worth noting that liquidity coverage requirements (how much you have to have in liquid assets to pay people's deposits back on demand)) is not the same as capital requirements (the value of assets you must have that aren't owed to anybody that can absorb losses before said losses are met by your deposits).
To take a simplified example, if you wanted to start a bank, you'd need to raise capital in the first instance. So you get a bunch of investors to buy shares and now you have $10.
This is regulatory capital so you can't lend it.
In addition, because it is supposed to act as buffer to protect depositors (when you get some), there needs to be a relationship between how much of it you have and how much you can lend.
Because different uses of depositors funds are of different risk (for example, lending it to a business vs. sticking on deposit with another bank), the regulator says something like, " For ordinary lending, for every $10 you lend, you must have $1 in capital. We shall call this 100% risk weighted. However, certain loans are lower risk and we shall call these 50% risk weighted so you only need to hold $.50 in capital for every $10 lent. And if you simply put deposits on deposit with another bank, we shall call that 0% risk weighting and you need hold no capital against them".
You then raise a bunch of deposits, say $100.
But you can't lend all of that because you have liquidity ratios to meet (let's say 10%). So you put $10 aside to meet your liquidity requirements.
Well, that's OK, but what about your capital requirements. Well, if the $90 you want to lend is 100% risk weighted, you would need $9 in capital which we have (in addition to the $10 in liquidity we are holding back) so all good.
However, if we raised another $100 in deposits and put aside $10 for liquidity requirements, can we lend that?
We want to have $180 in loans out the door but we only have $10 in capital, not the $18 our friendly regulator wants us to have. Our $10 in capital only allows us to have $100 out the door in 100% risk weighted assets so we have to put the rest somewhere with no risk weighting (another ADI for example), go out and raise some more capital or reduce our on-balance sheet lending (which is why securitisation became to popular).
Not sure if this helps or muddies the waters
As far as funding costs go, that's a whole other matter but the cost of lending is a function of the cost of raising money. The price you pay for deposits relative to the cash rate is vastly different than it was 5 years ago. As deposits become more desirable, the price goes up and that filters through to the cost of borrowings.
