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FSA proposes major overhaul of lenders’ risk management

The Financial Services Authority has proposed a major overhaul of the liquidity requirements for banks, building societies and investment firms.

In a consultation paper published today it proposes getting firms to adopt a quantitative framework for risk management which places greater emphasis on a firm’s ability to spot liquidity risks and tackle them.

There would also be a greater emphasis on stress testing and back-up funding plans, new liquidity reporting requirements.

It also wants to take a new approach to firms operating in the UK who are part of wider UK or international groups.

But it warns that in some cases the measures would mean that firms would need to reshape their business models over the coming years.

The CP comes on the back of the Queen’s Speech yesterday in which the government pledged to improve the resilience of the financial services sector.

The FSA claims that the upshot of the measures would be that it would improve the FSA’s ability to monitor and supervise firms’ liquidity risk exposures.

Paul Sharma, director of wholesale and prudential policy at the FSA, says: “We are pleased with the way in which the industry has engaged with us on this issue.

“These new proposals take on board the feedback we have received to last year’s discussion paper 07/7 as well as the lessons both we and firms have learned from the recent market volatility.

“We have put forward a robust set of proposals that we believe will greatly improve firms’ ability to deal with liquidity risks, and thereby increase the overall stability of the UK financial markets.

“This builds on the international work on liquidity that is currently in train.”

The consultation period closes on March 4 2008. The FSA hopes to introduce new rules in October 2009.

As part of the CP the FSA is also pre-consulting on the reporting requirements for the new liquidity regime.

The consultation period runs for a month and the FSA will then look to issue a separate reporting CP in Q1 2009.

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