FSA Publishes Industry Feedback On Liquidity Requirements

by Jason Gorringe, Tax-News.com, London

29 May 2008

The UK's Financial Services Authority (FSA) on Tuesday published feedback to its Discussion Paper on liquidity requirements for banks and building societies.

The paper looked at ways that liquidity policy should develop, and focussed on lessons learned as a result of recent market conditions.

Respondents broadly agreed with the policy objectives set out in the discussion paper, and with the FSA’s current high level standards and principles-based approach.

The key points that emerged from the responses were that:

• There was strong agreement on the need to continue coordinating the FSA’s work on liquidity both at a national level (with the other Tripartite Authorities) and on an international level;
• Most respondents are reviewing their stress testing scenarios and contingency funding plans in line with lessons learned over the past year;
• The majority of respondents stressed the importance of the close relationship between the central bank’s role, actions and provisions, and firms’ internal liquidity risk management processes, as well as any measures developed by the FSA under a new regulatory regime; and
• Most respondents agreed that quantitative requirements were a necessary component of any liquidity regime, particularly for the short term, and agreed that one single quantitative regime should replace the existing three.

There was some scepticism, however, about the usefulness of quantitative requirements to safeguard against long-term chronic liquidity stresses, and about the possibility of standardisation across institutions.

Paul Sharma, Director of Wholesale and Prudential Policy, commented:

"We welcome the wide range of feedback we have received to DP07/7. The responses contain useful comments and suggestions, which we will consider in detail as we develop our work on a new liquidity regime."

"We look forward to continuing our constructive engagement with the industry and other interested stakeholders and remain committed to full transparency throughout the ensuing consultation process."

The FSA will consult further on all aspects of the new regime later this year, including setting out proposals on sound practices for managing liquidity risk with a strong focus on stress-testing.

These enhanced qualitative requirements will reflect the work currently underway in the Basel Committee and will be the centre-piece of the new liquidity policy, according to the financial services regulator.

The FSA continues offer input into the international work on liquidity that is currently in train.

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