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In December the UK’s Financial Services Authority (FSA) published Consultancy Paper 08/22 which proposed changes to the liquidity risk management and reporting processes. Consultation on this ends next Wednesday, final rules are expected in April and the FSA expects to implement this in 2009 of this year. The implications of this paper seem to have been understated by the press and commentators, but the implications are significant, the effort to implement could be major and the time is limited.
The new regime is a comprehensive measurement, reporting and management requirement for firms similar to that required for capital adequacy. It even has its own equivalent of the ICAAP, the Individual Liquidity Adequacy Assessment (ILAA) and, as well as reporting, will require a liquidity funding contingency plan, changes to stress testing processes and management responsibilities, as well as the creation of a liquidity awareness across the institution, a “liquidity culture”.
There have been liquidity reporting requirements to date but these have been limited. The new regime is now requiring increased reporting, with nine new reports, some daily, and others to be produced within 3 working days of the month end (are your month end accounts ready by then?). The scope of the requirements is being widened from UK banks to all banks, building societies and, significantly, investment firms, and it is being deepened to include all legal entities and all branches. Overseas banks are being pulled into the net.
This initiative is in parallel with other activities. The Committee of European Banking Supervisors (CEBS) is planning liquidity recommendations in March and is expected to base much of these on the FSA’s proposals. In fact it appears that the FSA is laying down a template in the expectation that other regulators will follow their model and that a global standard for liquidity risk measurement, reporting and management will evolve.
There are many questions that arise for firms, not least of which is how does one specify, design and deliver the new processes and systems in eight months. The new regime will involve the treasury, ALM, financial accounting teams as well as the risk management function. Who takes the lead in this?
There has been discussion of possible waivers for some firms and of delaying the implementation. But in the current political climate with regulators seeking to claw back their credibility and the public calling for blood, it is difficult to see either of these possibilities happening. Some overseas banks have threatened to leave London – but international regulatory development makes it unlikely they will escape such a regime.
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