FSA has published its long-awaited consultation paper on strengthening liquidity standards. The paper is detailed and explains the current regime and principles behind it. It then focuses on:

  1. new systems and controls requirements to apply to all BIPRU firms and UK branches of some non-UK banks. This puts more emphasis on how firms assess liquidity risks and develop policies to deal with them. It also places more importance on stress testing and contingency funding plans. Its major principles are that all firms should have adequate liquidity and should not rely on other parts of their group to survive stresses unless FSA allows this;
  2. the ILAS (Individual Liquidity Adequacy Standards) component: the standard will be based on what will allow firms to survive varying liquidity stresses. There will be a quantitative standard for simpler firms that fall within the scope of ILAS;
  3. liquid assets: FSA does not think holding a buffer of liquid assets to protect against liquidity stress is enough. It wants each firm to know its gross liquidity risk and stress test its balance sheet so the whole liquidity profile of the firm does not exceed acceptable levels;
  4. group-wide liquidity management, so firms can sometimes deviate from selfsufficiency; and
  5. a pre-consultation on liquidity reporting requirements. FSA wants to have granular, standardised liquidity data that will allow it to form views on risk exposures at firm, sector and market levels.  

FSA recognises its proposals will mean significant change and will lead some firms to reshape their business model. The consultation includes draft new definitions for the Glossary and new text for BIPRU in the form of a new Chapter 12. FSA wants to implement the new regime by October 2009. It wants comments on most of its proposals by 4 March but on the pre-consultation by 6 January so it can follow this with a full consultation and still meet its deadline.