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October 6, 2009

FSA liquidity rules steer banks towards government bonds

by Gill Montia

Story link: FSA liquidity rules steer banks towards government bonds

The UK financial sector is digesting new liquidity rules set out by the Financial Services Authority (FSA) yesterday, which mean banks and investment firms will have to increase their holdings of government bonds by a combined £110 billion in the first year of implementation.

The new rules mean that banks will abandon investment in other areas of the bond market, such as securitised bonds and bonds issued by companies seeking to raise cash.

The regulator says the regime is aimed at enhancing firms’ liquidity risk management practices and will require changes to business models, including reducing reliance on short-term funding by 20%, also in the first year of implementation.

The FSA’s director of prudential policy, Paul Sharma, says: “In the current crisis, some firms weathered the storm better than others.”

He adds: “These firms tended to be those that had policies that were similar to those that we are introducing today – including holding assets that were truly liquid, such as government bonds.”

The qualitative aspects of the regime will be put into place by December 2009.

However, the potential economic impact of the requirement to up holdings of government bonds means the regulator will delay enforcing its requirement until the recession is over.

The British Bankers’ Association’s executive director for prudential capital and risk, Simon Hills, has responded by saying that the FSA must avoid “at all costs” curtailing the ability of banks to lend.

He adds: “Self-evidently any money held in these ‘liquidity buffers’ is money that banks cannot lend to individuals and businesses.”

 

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