Liquidity rules could push up rates

Article Category: Interest Rates

By www.brokernews.com.au By Andrea Cornish, 6 September 2010

Mortgage rates could come under pressure as banks look to offset the cost of new liquidity rules.

The liquidity rules, which require banks to increase their capital holdings as a safeguard against another economic crisis, have been hotly debated in the banking community.

New research from Citi reveals that demand for top-rated government bonds is likely to exceed supply, creating a $27bn shortgage.

Citi economist Joshua Williamson told the Sydney Morning Herald that, if left unaddressed, the supply shortgages would drive up bank costs because bond prices would increase.

"There is not enough high-grade federal and state government bonds to satisfy regulatory demand, let alone the combination of regulatory and normal market demand," Williamson said.

"To the man in the street, it means that the banks may have to put up interest rates on their loans."

Banks are asking regulators to broaden the definition of top-tier assets.