Making banks self-insure forces them to internalize more of the costs that they periodically put upon taxpayers. Banks will find it harder to generate profits by taking on extreme liquidity risks, believing they will be bailed out in a crisis.
London’s competitive position depends on counterparties’ perception of the financial soundness of the firms that operate in the UK. Low-levels of financial soundness cannot provide sustainable long-term competitive advantage. The FSA’s new requirements are designed to protect customers, counterparties and other participants in financial services markets from the potentially serious consequences of imprudent liquidity risk management practices.
Specifically, the rules include:
· an updated quantitative regime coupled with a narrow definition of liquid assets;
· over-arching principles of self-sufficiency and adequacy of liquid resources;
· enhanced systems and controls requirements;
· granular and more frequent reporting requirements; and,
· a new regime for foreign branches that operate in the UK.
Paul Sharma, FSA director of prudential policy, said:
"The FSA is the first major regulator to introduce tighter liquidity requirements for firms. We must learn the lessons of the financial crisis and we believe that implementing tougher liquidity rules is essential to ensure we are in a better position to face future crises.”
The FSA will not tighten quantitative standards before economic recovery is assured. It plans to phase in the quantitative aspects of the regime in several stages, over an adjustment period of several years. This is to take into account the fact that all firms at present are experiencing a market-wide stress.
The precise amount of liquidity that each firm will need to hold will be refined over time to ensure that the combined impact of higher capital and liquidity standards is proportionate.
The qualitative aspects of the regime will be put into place by December 2009.
The FSA strongly supports the liquidity work streams that are underway internationally, although it recognizes that it may be some time before there is international agreement on specific proposals, therefore, the structure of the new regime is sufficiently flexible to allow the FSA to amend it through time to reflect any new international standards.
© FSA - Financial Services Authority
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FSA liquidity ps09_16.pdf
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