The overhaul, designed to enhance firms' liquidity risk management practices, is based on the lessons learned since the start of the credit crisis in 2007. The new rules will require changes to firms' business models and will bring about substantial long-term benefits to the competitiveness of the UK financial services sector, according to the FSA.
The FSA said: “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.
"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."
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 workstreams that are underway internationally although recognises 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.
