Chris Joye has a good piece today examining the shortcomings of the RBA’s Committed Liquidity Facility (CLF) for banks (cash for coconunts as we call it at MB):
The Reserve Bank of Australia’s unique Committed Liquidity Facility – a little-known, taxpayer-backed “line of credit” to help banks overcome solvency crises – creates as many problems as it is intended to address.
The RBA claims there is a difference between an “illiquid” and an “insolvent” bank, and the new facility, which could be as large as $380 billion, will be made available only to “solvent” institutions.
…The Committed Liquidity Facility opens a Pandora’s box of problems. The most obvious concern is that it inverts the logic of the Basel Committee’s post-GFC policy remedies by entrenching taxpayer loans as a first, rather than last, line of defence against bank collapses.
A second class of concerns relates to who actually controls, and is responsible for, the CLF and the manner in which it is deployed.
The facility was designed and announced by APRA and RBA staff with no public debate or oversight. The bureaucrats’ view is that it was within their mandate to do so.
…In contrast to the Basel Committee’s recommendations, and the models adopted by overseas regulators, APRA and the RBA have also refused to allow Australian banks to hold rated corporate bonds and asset-backed securities as “Level 2” liquid assets. APRA argues that Australian bonds are not liquid enough to warrant inclusion. But this logic is circular: if you actively discriminate against them, you undermine market liquidity.
Regular readers will note that I have made the same objections many times. They boil down to a lack of transparency and accountability, as well as bulging moral hazard. They are very real and very large issues.
The problem is, now that we’re in this situation, with four too-big-to-fail banks squeezed between inflated assets and the foreign debt that inflated it, unless you want to let the system collapse under duress there is no choice but to provide some form of liquidity support.
Chris Joye’s implied answer, of allowing banks to hold each others assets, is no answer at all. The real differences between the banks balance sheets are so small that under stress all four majors are likely to be in trouble together so why would you have them hold each others assets? As well, asset-backed securities (by which Mr Joye means mortgage backed-securities) proved in the GFC to be no more liquid under stress than anything else.
Mr Joye has also argued in the past for government guarantees to RMBS, such as those provided in Canada, but that hardly solves the issues of transparency, moral hazard or accountability does it?
I can accept the RBA’s facility (as well as other government guarantees) as the least worst solution. What they need, however, is greater transparency, appropriate oversight (including tax-payer representation on bank boards) and market-related fees.
I have previously suggested some kind of new agency or function based around the US’ Federal Deposit Insurance Corporation as a solution. But you probably need a new banking inquiry to look at at all options honestly. I say probably because the fear is it will simply become a vehicle of liberation for the next round of credit cavaliers.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.