The regulator says the new rules – which will not come into force before an economic recovery is assured – are designed to improve firms’ liquidity risk management practices following the lessons learned from the financial crisis in 2007.
The FSA says they will protect customers, counterparties and other particular participants in financial services from imprudent liquidity risk management practices.
The rules include an updated quantitative regime coupled with a narrow defintion of liquid assets; over arching principles of self-sufficiency and adequacy of liquid resources; enhanced systems and control requirements; granular and more frequent reporting standards and a new regime for foreign branches that operate in the UK.
FSA director of prudential policy Paul Sharma says: “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.”
The FSA 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.