The Financial Services Authority emphasises that its liquidity guidance regime means that liquid asset buffers can be drawn down in the event of liquidity stress and used for the duration of the period of stress.
The FSA has also announced that, in the current conditions and in light of the improved level of liquidity insurance to be provided by the Bank of England, it will adjust its guidance to certain banks on appropriate levels of liquid asset buffers.
For those banks which hold pre-positioned collateral at the Bank of England, the FSA will take some account of their potential access to central bank liquidity when formulating its guidance on appropriate liquidity buffers. Details will be discussed with banks on an individual basis.
This adjustment reflects the increasing degree of contingent liquidity insurance which the Bank of England will now provide, following the activation of the ECTR facility. It also means that the ability of banks to support lending to the real economy, including through the Funding for Lending scheme, will not be impeded.
These FSA actions are in line with the recommendations of the Financial Policy Committee which have also been announced this morning. Recommendation 4 is that “The Committee recommends that the FSA makes clearer to banks that they are free to use their regulatory liquid asset buffers in the event of a liquidity stress. The ability to do so is enhanced by additional contingent liquidity made available to banks by the Bank. The Committee also recommends that the FSA considers whether adjustments to micro prudential liquidity guidance are appropriate, taking some account of this additional liquidity insurance”.
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