UK won’t tighten liquidity rules on banks for now

March 8, 2010

By Huw Jones

LONDON, March 8 (Reuters) – Banks operating in Britain were given more breathing space on Monday when their regulator, the Financial Services Authority, said it would not demand higher liquidity levels until the economy is recovering properly.

The FSA angered local banks last year by pushing ahead with a new liquidity regime requiring then to hold buffers of cash or highly-liquid assets like government bonds to withstand market shocks for a week or more without having to raise fresh capital.

The watchdog began rolling out the new regime last October, which includes frequent reporting of liquidity levels as part of wider efforts to learn from the financial crisis and lessen the need for more massive taxpayer bailouts of banks.

It had been expected to ratchet up the requirements sometime this year — in a boost to the UK gilts market — if economic recovery was assured but the bounce back has been anaemic.

“The FSA believes that it would be premature to increase liquidity requirements across the industry at the current time. This position will be reviewed later on in the year with a further announcement in Q4, 2010,” the FSA said in a statement.

“Meanwhile, the FSA is continuing to work with firms that are most affected by the new regime focusing on the steps they are taking to mitigate liquidity risk and on the additional impact of our progressively tightening quantitative requirement,” the FSA said.

The announcement comes on the day the Basel Committee on Banking Supervision, a global body of central bankers and regulators, including the Bank of England, meets in the eponymous Swiss town.

It is reviewing progress on finalising a sweeping package of reforms to introduce tougher capital and liquidity requirements for banks in all the G20 group of leading countries.

The British Bankers’ Association welcomed the FSA’s delay.

“While the industry favours a build up of stronger quantitative safeguards for liquidity, the implementation of the new regime needs to be timed so as not to delay economic recovery,” a BBA spokesman said.

“We have urged the FSA to wait for an international agreement on international liquidity standards and we support the current Basel Committee and (EU) CRD 4 work on this as well as the quantitative impact assessment that is currently being undertaken,” the BBA said.

Britain’s decision to press ahead with its own liquidity regime before Basel finalised a globally coordinated version, had raised concerns that UK banks — and foreign branches and subsidiaries operating there — would be at a disadvantage.

“The FSA is also actively contributing to the international debate on liquidity,” the watchdog said.

Britain was stunned into unilateral action after having to bailout UK deposit holders in failed Icelandic banks.

(Reporting by Huw Jones, editing by Ron Askew and Toby Chopra)

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