Strengthening Liquidity Standards (CP08/22)

Updated February 2009

The FSA proposes rules that are based on recently agreed international liquidity standards, and in particular the Basel Committee on Banking Supervision’s Principles for Sound Liquidity Risk Management and Supervision. The FSA also takes into account difficulties faced in the market over the past 18 months. 

The FSA proposes the following:

• a new, quantitative framework for liquidity risk management which places greater emphasis on a firm’s ability to assess liquidity risks and develop policies to tackle them; 
• a strengthened, qualitative framework for liquidity risk management with an increased focus on firms' stress testing and contingency funding plans;
• new liquidity reporting requirements; and
• a new approach to firms operating in the UK which are part of a wider UK or international group.

The consultation paper will be open for responses until 4 March 2009. The FSA anticipates introducing the new rules in October 2009.

The proposals are extensive and consequently firms will need to review their current agreements and practices as it seems likely that many institutions will need to significantly restructure their business models over the coming years. The FSA’s objectives will continue to put the responsibility of adopting a sound approach to liquidity risk management on firms and their senior management.

It remains to be seen how helpful these proposals will be in further thawing the credit freeze on the financial markets. It is however, anticipated that the proposals will improve the FSA’s ability to monitor and supervise firms' liquidity risk and this may increase the willingness between banks to lend.
 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2009. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.