The U.K. Financial Services Authority (FSA) published Monday the new liquidity requirements it will be expecting of certain classes of financial institutions as early as year-end. Specifically, the final set of rules include:

  • An updated quantitative regime coupled with a narrower definition of liquid assets;
  • Principles of self-sufficiency and adequacy of liquid resources;
  • Enhanced systems and controls requirements based on the Basel Committee on Banking Supervision’s Principles for Sound Liquidity Risk Management;
  • Granular and more frequent reporting requirements (as often as monthly in non-stressed times and weekly in stressed times); and
  • A new regime for foreign branches that operate in the U.K.

In particular, in response to concerns about the stability of financial institutions and their over-reliance on short-term credit-sensitive markets and securitization markets to meet funding goals, the FSA’s new quantitative tests include new stress standards, requirements for greater portfolio diversity, and requirements to fully account for all rating triggers. In addition, greater reporting and monitoring requirements are being imposed on financial institutions to help signal problems on an earlier timetable. Finally, an industry-wide requirement of a liquidity buffer consisting of government bonds with frequent turnover will be imposed to create a more standardized liquidity mechanism for financial institutions.

The FSA acknowledges the need to proceed slowly with respect to some of the quantitative aspects of the new policy regime, which the FSA expects to implement over the course of the next several years, once financial stability in the marketplace is assured. However, some of the qualitative aspects of the new liquidity regime, such as controls and reporting, will be implemented for most companies by December 1, 2009.