The UK’s Financial Services Authority has taken another step toward overhauling liquidity requirements in response to the global financial crisis.

The FSA says that 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”.

Specifically, the rules include: an updated quantitative regime coupled with a narrow definition of liquid assets; overarching 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.

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,” Sharma added.

The FSA stressed that it 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. “Phasing the period in which firms will build up their liquidity buffers should mitigate the knock-on effects to bank lending,” said Sharma.

The qualitative aspects of the regime will be put into place by December.

The FSA adds that it strongly supports the work to improve liquidity standards that is underway internationally, but it recognises that it may be some time before there is international agreement on specific proposals. Therefore, the structure of the FSA’s new regime is sufficiently flexible to allow the FSA to amend it through time to reflect any new international standards.

“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,” it adds.

IE