The regulator proposes firms will need enhanced liquidity risk management capabilities including greater use of stress testing and improved contingency funding plans.
They will also have to be less reliant on short term wholesale funding, including that from foreign counterparties and there will be greater incentives for firms to attract a higher proportion of retail time deposits.
The paper also proposes that firms will have a higher amount and quality of liquid asset stocks including a greater proportion held as government debt.
Banks will also need to keep a check on unsustainable expansion of bank lending during favourable economic times.
The proposed rules are based on recently agreed international liquidity standards, in particular the Basel Committee on Banking Supervision’s Principles for Sound Liquidity Risk Management and Supervision.
FSA director of wholesale and prudential policy Paul Sharma says: “We are pleased with the way in which the industry has engaged with us on this issue.
These new proposals take on board the feedback we have received to last year’s discussion paper 07/7 as well as the lessons both we and firms have learned from the recent market volatility.
“We have put forward a robust set of proposals that we believe will greatly improve firms’ ability to deal with liquidity risks and thereby increase the overall stability of the UK financial markets. This builds on the international work on liquidity that is currently in train.”
As part of the CP the FSA is also pre-consulting on the reporting requirements for the new liquidity regime. The consultation period runs for a month and the FSA will then look to issue a separate reporting CP in Q1 2009.
The consultation period closes on March 4 2009. The FSA hopes to introduce new rules in October 2009.