Australian banks to buy more govt debt under liquidity rule changes - AFR

SYDNEY, Sept 8 (Reuters) - Australian banks will be required to buy up to A$240 billion ($175 billion) of new government debt to boost emergency liquidity levels, which will also cut government borrowing costs and help fund coronavirus stimulus spending, the Australian Financial Review reported on Tuesday.

Bank executives have been in talks with industry regulator the Australian Prudential Regulation Authority (APRA) about the planned bank liquidity rule change, which is expected to be unveiled after the federal budget in October, the newspaper reported.

The main purpose of the move would be to “enhance bank stability in line with international rules so banks continue to withstand periods of financial stress”, the newspaper said, without identifying its sources.

But a secondary goal would be to lower government interest rates “as banks buy more government bonds instead of holding private sector bank bonds and residential mortgage backed securities”, the article added.

The Reserve Bank of Australia (RBA) last week said it would increase the size of its term funding facility to around A$200 billion at a fixed rate of 25 basis points for three years.

Banks will be able to draw up on this extra funding up until the end of June 2021.

The RBA launched an “unlimited” bond buying programme in March and has since bought A$66 billion of government securities.

Local banks have been big buyers of public debt during the pandemic, adding to the 20% of federal government bonds and almost 50% of state government debt they held before the COVID-19 crisis hit Australia.

An RBA spokeswoman directed a Reuters inquiry to APRA, which declined to comment.

Representatives of Commonwealth Bank of Australia, Westpac Banking Corp and Australia and New Zealand Banking Group Ltd - the country’s largest, second largest and fourth largest lenders - were also not immediately available for comment.

A spokesman for No. 3 lender National Australia Bank Ltd declined to comment.

$1 = 1.3738 Australian dollars Reporting by Renju Jose and Byron Kaye; Editing by Jane Wardell