The Financial Services Authority (FSA) has today published a consultation paper (CP) which proposes a far-reaching overhaul of the liquidity requirements for banks, building societies and investment firms.
The proposed rules are based on recently agreed international liquidity standards, in particular the Basel Committee on Banking Supervision’s (BCBS) Principles for Sound Liquidity Risk Management and Supervision and also take into account difficulties faced in the market over the past 18 months.
Whilst it remains the responsibility of firms’ senior management to adopt a sound approach to liquidity risk management, the FSA is proposing the following:
- a new, quantitative framework for liquidity risk management which places greater emphasis on firms’ ability to assess liquidity risks and develop policies to tackle them;
- a strengthened qualitative framework for liquidity risk management, with an increased focus on firms’ stress testing and contingency funding plans;
- new liquidity reporting requirements; and
- a new approach to firms operating in the UK which are part of a wider UK or international group.
The measures proposed in the CP are designed to enhance firms’ liquidity risk management practices significantly and will, in some cases, reshape their business models over the coming years. They will also improve the FSA’s ability to monitor and supervise firms’ liquidity risk exposures.
Paul Sharma, director of wholesale and prudential policy at the FSA, said:
"We are pleased with the way in which the industry has engaged with us on this issue. These new proposals take on board the feedback we have received to last year’s discussion paper 07/7 as well as the lessons both we and firms have learned from the recent market volatility.
"We have put forward a robust set of proposals that we believe will greatly improve firms’ ability to deal with liquidity risks, and thereby increase the overall stability of the UK financial markets. This builds on the international work on liquidity that is currently in train.”
The consultation period closes on 4 March 2009. The FSA hopes to introduce new rules in October 2009.
As part of the CP the FSA is also pre-consulting on the reporting requirements for the new liquidity regime. The consultation period runs for a month and the FSA will then look to issue a separate reporting CP in Q1 2009.
