FSA wants liquidity rules revamp

The Financial Services Authority is recommending a shake-up of the liquidity rules for banks, building societies and investment firms.

The regulator has published a consultation paper proposing that firms work to a “bespoke quantitative framework” based on negotiations with the FSA.

Previously, lenders were categorised in three groups, each with its own liquidity requirements. The sweeping changes proposed by the regulator focus on stress testing, contingency funding and policies to tackle risk.

As a result of the shake-up, some organisations would have to reshape their business models to improve their risk management.

Paul Sharma, director of wholesale and prudential policy at the FSA, says: “These proposals take on board feedback we received from last year’s discussion paper as well as the lessons we and companies have learnt from the recent market volatility.

“We have put forward a set of proposals we believe will improve firms’ ability to deal with liquidity risks, thereby increasing the stability of the financial market.”

Melanie Bien, director at Savills Private Finance, says that despite the government pouring cash into banks there are still incentives for firms to stress test their models.

She says: “These are exceptional times and it is arguable that risk management is more important than ever.”

The consultation period for the proposals ends on March 4 2009.