New liquidity regime may cost clients dear
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Higher mortgage rates and lower savings rates will be the result of the regulator’s new liquidity rules, the Building Societies Association has warned.
Last week the Financial Services Authority became the first financial regulator in the world to introduce new liquidity requirements.
The overhaul is designed to enhance firms’ liquidity risk management practices and is based on the lessons learnt since the start of the credit crisis in 2007.
With the UK still in the grip of recession the regulator says it will not tighten quantitative standards before an economic recovery is assured, and plans to phase in the quantitative aspects of the regime in stages over a period of years.
The precise amount of liquidity that each firm will need to hold will be refined over time in an attempt to ensure that the combined impact of higher capital and liquidity standards is proportionate.
The qualitative aspects of the regime will be put in place by Dec-ember 2009 and the new rules include more frequent reporting re- quirements and an updated quantitative regime coupled with a narrower definition of liquid assets.
Under the rules, banks and building societies will need to maintain a financial buffer of liquid assets that is made up of high quality government bonds, central bank reserves and bonds issued by multilateral development lenders such as The World Bank.
Paul Sharma, director of pruden-tial policy at the FSA, says: “Some firms have weathered the storm better than others. The stronger ones tend to be those that have policies similar to those we are introducing, including holding assets that are truly liquid such as government bonds.
“Phasing the period in which firms can build up their liquidity buffers should mitigate the knock-on effect on lending.”
The BSA says it recognises the regulator’s objectives and that it is important for banks and societies to hold adequate levels of high quality liquidity.
But it adds that the assets the FSA is suggesting that banks and societies hold yield low returns and this will affect the products that can be made available to consumers.
A spokeswoman for the BSA says: “In the current environment one of the consequences of holding high levels of low yielding liquid assets is that savings rates will be lower than they otherwise would be and mortgage rates higher.”
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