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UPDATE 1-Australian regulator allows $25 bln reduction in banks' committed liquidity facility

(Adds background on government budget, CLF requirements)

Nov 6 (Reuters) - Australia’s banking regulator on Friday lowered the amount of reserves banks are required to hold under the central bank’s committed liquidity facility (CLF), due to the increasing amount of government bonds being issued and bought by banks.

The Australian Prudential Regulatory Authority (APRA) said in a statement it would allow a A$35 billion ($25 billion) reduction in the total amount under the facility for major domestic banks, based on the amount they held at the start of 2020.

Liquidity rules require a bank to hold high-quality liquid assets that can withstand a 30-day period of severe liquidity stress, and government bonds are recognised as assets of such quality, but were not available in sufficient quantities until recently.

The coronavirus pandemic has now changed that, as the government was forced to increase its debt issuance to help fund massive fiscal stimulus measures to pull the economy out of a historic slump.

The regulator said that given the surge in government debt issuance, which was projected to increase further based on the recent budget announcement, it expected CLF allocations for 2021 to fall.

In the government’s budget proposal, stimulus measures are forecast to push the budget deficit out to a record A$213.7 billion, or 11% of gross domestic product, for the fiscal year ending June 30, 2021.

It would be reasonable to expect that if government securities outstanding continue to increase beyond 2021, the CLF may no longer be required in the foreseeable future, the regulator added. ($1 = 1.3763 Australian dollars) (Reporting by Rashmi Ashok in Bengaluru; Editing by Muralikumar Anantharaman and Lincoln Feast.)

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