Pains and gains of new liquidity rules.
Posted on October 13th 2009
The FSA’s paper on new liquidity requirements was published last week and I have no doubt that the impacts of the new rules will be far reaching. Given that the banks’ management of liquidity was a major contributor to the global financial rollercoaster we experienced last year, it makes a lot of sense for the regulator to focus its attentions on this area of significant weakness. Banks, building societies and any other firm that holds retail deposits are going to have to comply with new tougher rules on how much liquid assets they hold whilst at the same time will have to comply with maximum levels of wholesale funding of 25% of the firms total funding.
To put it into context it was not uncommon for some large scale lenders to be running at wholesale funding levels north of 60% so it is going to be painful for some firms to transition. Whilst the FSA has said they will not introduce these new tougher measures until they are sure that the economy has stabilised and even then the requirements will be phased in over several years, the reality is that tighter regulatory control started in September 2007. Since then many firms have been on daily reporting to the FSA and the rest have been on weekly reporting with the result being a significantly increased level of liquidity held by banks and building societies.
Indeed this is one of the areas that has been constraining lending levels in 2009 and no doubt this constraint will only continue as a result of these new rules. That being said, I do agree that you cannot build competitive advantage on unsustainable business models so in the long run this is likely to be a good thing for the stability of UK PLC.
