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Regulation: UK FSA jumps the gun on liquidity

Plans on hold until recovery assured; Eligible asset limitations anger banks

The UK’s Financial Services Authority stoked controversy last month with the announcement of its new rules on UK bank liquidity. Perhaps conscious of the stinging criticism it attracted for its light-touch regulation before the crisis, the FSA is first out of the gate among the main regulators on liquidity changes.

Under the new rules banks must hold a buffer of easily saleable securities. These should be unencumbered, banks will have to test market liquidity by periodically churning the buffer and liquidity management will be separated at entity level – requiring each subsidiary to be self-sufficient.

"In the current crisis some firms weathered the storm better than others," commented FSA director of prudent policy Paul Sharma. "These firms tended to be those that had policies that are similar to those that we are introducing – including holding assets that were truly liquid, such as government bonds."

The narrow definition of eligible liquid assets (high-quality government bonds, central bank reserves and bonds issued by multilateral development banks) has drawn criticism from the industry. "We would have liked to have seen a broader definition of a liquid asset buffer (LAB)," says Tim Buenker, policy advisor at the British Bankers’ Association (BBA).

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