FSA Managing Director Michael Foot said: "There is a strong case for introducing an effective single framework of quantitative requirements to apply to all financial firms with significant liquidity risk. Long experience suggests that a liquidity crisis can hit a firm very quickly and easily spill over into a life-threatening solvency crisis. The present deposit-taker rules on liquidity have been little changed for the last 20 years. We also need to revisit the treatment of liquidity in the significant investment firms, given the nature of the business they now do and the assets they hold.
"Experience has shown that developing standards in this area is complex. We have already had extensive pre-consultation discussion with key firms but now wish to extend the range of firms with whom we want a dialogue. Our aim with the integrated framework proposed is to reduce the probability that consumers will suffer loss or financial markets be disrupted, as a result of a firm failing through a crystallisation of liquidity risk. It would do so by putting in place a minimum standard of adequacy of firms' liquidity, limiting the amount of liquidity risk they may incur.
"We are keen to hear the industry's - and others' - views, and to obtain input from firms which will help us with the calibration of our final proposals for the Integrated Prudential Sourcebook. They will be the subject of formal consultation, at present planned for autumn 2004."
Background
- Discussion Paper 24 Liquidity risk in the Integrated Prudential Sourcebook: a quantitative framework is available here .
- Liquidity risk is the risk that a firm, though solvent, either does not have sufficient financial resources available to it to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. It is a basic business risk faced to some degree by most financial services firms.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
