Australian Bid to Boost Bank Liquidity Has Worked, Debelle Says

By Jacob Greber

Oct. 31 (Bloomberg) -- The Australian central bank's efforts to keep liquidity flowing through the nation's financial system have been successful, said Assistant Governor Guy Debelle.

``The fact that the bank has for a long time dealt daily with a wide range of counterparties across a wide range of maturities has allowed us to respond quickly and flexibly,'' Debelle said today in a speech in Melbourne. His speech didn't address the bank's monetary policy or Australia's economy.

Since the onset of the global credit squeeze in August 2007, the Reserve Bank of Australia has broadened the range of collateral it accepts from financial institutions, introduced new term deposits and injected U.S. dollars from the Federal Reserve into the local market. Tensions in money markets ``increased significantly'' from early September, exacerbated by the collapse of Lehman Brothers Holdings Inc., Debelle said.

``The framework for the Reserve Bank's market operations has been very flexible and has served us well,'' he said.

Increased demand for credit saw the balance on so-called exchange settlement accounts, used by banks to draw down liquidity from the Reserve Bank, surge to a daily peak of A$11 billion ($7.3 billion) in mid October from the A$750 million which ``had prevailed for a number of years,'' the assistant governor said.

``The degree to which turnover in the cash market has been affected by the turbulence and by the heightened counter-party fears should not be overstated,'' he said.

Daily Turnover

``The daily turnover in the cash market has been relatively constant throughout and has been largely unaffected by the size of exchange settlement balances.

``Thus, a crucial part of the financial system, which lies right at its heart, has continued to function well.''

The Federal Reserve's swap facility, introduced last month to increase U.S. dollar liquidity in Australia and elsewhere around the world, appears ``to have had some success,'' he added. Conditions in the U.S. dollar swap markets have been ``improving over the last few weeks.''

The cost of U.S. dollar funding has also fallen to ``more normal rates,'' Debelle said.

To contact the reporter for this story: Jacob Greber in Melbourne at jgreber@bloomberg.net