Following the Financial Services Authority’s announcement that is to impose liquidity rules on banks, Jacqui Hatfield, Partner in the Financial Services Regulatory team at international law firm Reed Smith comments:
 
FSA pioneering liquidity rules ahead of Basel
 
"As expected the FSA has pressed ahead on its liquidity proposals ahead of international agreement of the Basel Committee measures.  They said in June that they would press ahead if international agreement was not reached quickly enough.  The FSA were keen to press ahead quickly following the Lehman collapse when they felt they did not have sufficient time to carry out an orderly run down of the UK subsidiary as a result of all the assets being directed back to and ring fenced in the US."
 
Need for Global regulation
 
"This is an area however where a global set of rules is required, in particular for international/global banks.  Currently even within the EU, liquidity is dealt with at a National level and this is an issue which needs to change. 
 
"There are currently Basel proposals and European proposals on the table awaiting agreement and the UK proposals are broadly along the same lines as those proposals.  The FSA will need to adapt its requirements where necessary if its proposals conflict with any agreed measures from the Basel Committee/EU in the future. 
 
"The question will be what damage if any will be caused by the FSA pressing ahead before International agreement is reached."
 

Driving business from the UK?
 
"The FSA liquidity and controls systems and controls requirements (principles based) will be in place in December and the FSA's prescriptive and detailed reporting requirements will need to be complied with by June next year.  These are not particularly controversial though and will not in themselves drive business away from the UK.
 
"The most controversial issue is the treatment of branches and subsidiaries of non-UK banks which could potentially drive business away from the UK.
 
"Current waivers will cease and the non-UK banks will need to seek new waivers from the FSA if they want to avoid needing to hold a sufficient liquidity resource at the UK branch/subsidiary level .  In order to obtain a new waiver they will need to convince the FSA that they can reasonably rely on the flow of liquidity from the rest of their group in times of stress in addition to normal economic conditions.
 
I still believe that the conditions for the waiver, being effectively that the relevant parent needs to be able to show the FSA that it has similar liquidity measures in place to the UK, are unlikely to be satisfied.  In addition I wonder how the FSA will cope with the amount of waiver applications it will receive."
 
Background
 
"The FSA proposals will come into force in December.  However,  thankfully liquidity buffers will not need to be in place until an appropriate time -. when we are in a period of economic recovery.  The FSA's requirements re: liquidity buffers will effectively be a requirement by the FSA to hold a certain amount of highly liquid assets eg. cash and government bonds.  The amount of highly liquid assets the bank will need to hold will be calculated by the FSA, following a self assessment of liquidity risk and stress testing by the banks which is reported to the FSA.    The  requirement to have liquidity buffers in place will hopefully not be required until Internationally agreed proposals on liquidity buffers come into force."

 
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Notes to editors

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