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15.10.2009

FSA Launches PS 09 16

On Friday 9th October, the FSA presented to a large audience in London its intentions for liquidity risk management in the London market bringing to a close the long process of updating this crucial piece of the London financial regulatory framework.   Niul Dillon Hatcher, Pelican’s Head of Regulatory Consulting, attended the presentation with Ian Gilmour, Pelican’s Managing Director (along with more than 300 London bankers) and reports:

In December 2007, the FSA began a consultation process with the UK financial services community on proposals designed to change regulation of liquidity risk management in London radically. The aim was, according to Lord Turner, (Chairman of the FSA): “to restore liquidity regulation and supervision to a position of central importance”.  

This process was completed on Friday 9th October when the FSA launched the final form of regulations in the context of Policy Statement 09/16 when David Morgan (Manager, Liquidity Policy) emphasised the FSA’s core objectives:

•    sustaining systemic stability;
•    maintaining the soundness of financial institutions; and
•    protecting consumers.

The key elements of this new attitude to liquidity risk designed to achieve these objectives are:

•    over-arching principles of self-sufficiency and adequacy of liquidity reserves;

•    enhanced systems and control requirements (implementing the BIS’ 2008 Principles for Sound Liquidity Risk Management and Supervision);

•    updated quantitative requirements coupled with a narrow definition of liquid assets;

•    a new scheme allowing for modification of the regime for branches/subsidiaries; and

•    granular and frequent reporting requirements.

The policy will be implemented by means of an amendment to the FSA’s regulatory handbook  (BIPRU Rule 12). The final form of the regulation takes account of some – but by no means all – of the comments provided by market participants as a result of the consultation exercise including:
•    expansion of the type of assets eligible for inclusion in the liquidity buffer;
•    amendment of the types of concession available; and
•    extension of implementation transition period.

The FSA states that it will look at banks as individual cases and that the regulatory treatment of each bank will depend on its significance to the local and international system and implementation of the regulations will be phased also but for some institutions changes will be effective as soon as December 2010.

At the launch, the FSA confirmed that it is aware that it is in the vanguard of international movement towards new style liquidity regulation but said that it would not tighten standards before economic recovery is assured.  It acknowledges that theirs is a tough policy that will require banks to amend business models. 

David Morgan said that this was necessary to avoid a return to previous practices particularly by discouraging reliance on short-term wholesale funding and increasing the quantity and quality of assets held in liquidity buffers.  The costs of restoring banks to stability in the current crisis had been borne by the taxpayer.  The new buffer was designed to ensure that such costs would be borne by banks which took the risks and the rewards.  It was acknowledged that these new and additional costs would, of course, be passed on to customers.

Sally Dewar, the FSA’s Managing Director-Risk said that it had considered representations made by the banking industry in London and had taken account of all those it thought appropriate. 

The FSA confirmed its support for the international initiatives (CEBS and BIS) in course and feels that its regime is sufficiently flexible to allow amendment in order to reflect new international standards when produced.

If you have any questions in relation to PS 09/16 or in relation to liquidity risk management generally, please contact Niul on +(44) (0) 20 7997 6051 or niul.dillonhatcher@pelican-consulting.co.uk.

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