Great piece in AFR analysing the nature of the RBA's commitment to backstop Australia's large banks in case of emergency. As has been so problematic in Europe, it seems the central bank is on the hook, and early.
...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. And it is not clear officials have thought these through....
...The Australian Prudential Regulation Authority appears to understand this nuance [of solvency]. Officials acknowledge that if a bank needed to draw on the CLF, it would be trading insolvent under the Banking Act in the absence of the taxpayer support, irrespective of whether it had “positive net worth”....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. (here)
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