In 2020, as a response to COVID19, the Australian government shut down the economy resulting in millions of Australian being unemployed and under-employed. Australia entered its first recession in almost 30 years, a time of extreme economic and financial uncertainty. Consequently, APRA announced tighter capital adequacy and liquidity adequacy regulation. For liquidity management, banks now need to hold more liquid assets to meet cash outflows.

i. Explain why APRA tightened liquidity regulation, by discussing the impact of such tightening on public confidence in Australia's banking sector. (6 marks)

ii. What impact could a tightening of liquidity regulation have on the cost of debt and the flow of funds in the economy? (6 marks)