The FSA has published its final rules on firms’ liquidity requirements following a number of consultations over the last two years. The rules are accompanied by feedback from those consultations, and an analysis of the feedback has been published in a separate document.
The aim of the FSA in producing the new rules is to enhance firms’ liquidity risk management practices in order to improve their financial soundness. The rules are designed to mitigate failures in liquidity risk management identified has having contributed to or exacerbated the current financial crisis, and 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.
- A new regime for foreign branches that operate in the UK.
The FSA intends that the qualitative aspects of the new rules will be in place by the end of 2009. However, it intends to phase in the quantitative aspects over a period of several years, in line with the economic recovery. The FSA has also built in a certain amount of flexibility into the rules with a view to enabling them to reflect international regulatory developments and agreements during the implementation period.
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.
In the current crisis some firms weathered the storm better than others. These firms tended to be those that had policies that were similar to those that we are introducing today - including holding assets that were truly liquid, such as government bonds. Phasing the period in which firms will build up their liquidity buffers should mitigate the knock-on effects to bank lending."
View Policy Statement 09/16: Feedback - detailed analysis, 5 October 2009