Who says the FSA is not considerate of banks’ feelings?
The regulator may be trying to enhance banks’ liquidity — but it is doing so oh so sensitively. In fact, it will wait for the economy to turn before it actually starts making banks’ follow its new guidelines on liquidity standards. From the FSA policy statement:
We have already said we would not seek to tighten quantitative standards before economic recovery is assured. We will therefore notify firms individually of the prospective impact on them of the new quantitative requirements, assuming they are fully implemented.We will then agree with each firm other than those operating under the simplified regime a timetable of potentially some years for completing transition to the new quantitative requirements. Because of the long transitional period, we do not expect that our policy will, in the short term, put significant downwards pressure on levels of bank lending.
And those liquidity requirements include — as speculated — a buffer of government bonds:
On liquid assets our final policy is that firms need to hold buffers comprising highquality government bonds. This represents prudent liquidity risk management practice as demonstrated by the significantly advantageous position through the past two years of those firms which had maintained higher proportions of their liquid assets in that form. In fact, some firms with very sound approaches to liquidity risk management have even more conservative definitions of liquid assets than we have proposed. The Bank of England strongly endorses our position. Its view is discussed in Chapter 8.
In practice, that will include debt from any European Economic Area central bank, or those of Japan, Switzerland, the US, Canada and new addition, Australia.
And what’s more — banks will actually be forced to use that liquidity:
8.14 In CP08/22 we proposed that firms should be required to turn over their liquidity buffers regularly in private markets. By this we meant that firms would regularly need to generate liquidity from their liquidity buffers through sale or repo.We received few comments on this proposal, but the feedback received was not supportive of the approach. For example, one respondent said:
- Testing the market … may be dangerous, sending the wrong signal to other market participants. … [F]irms who are seldom active in markets should only be required to research market prices periodically rather than actually executing trades.
8.15 We believe that the respondent’s concern over the existence of a turnover requirement justifies the need for such a provision. If generating liquidity from a firm’s buffer gives negative signals about its financial health it cannot serve the purpose for which it is designed. If a firm regularly and randomly turns over its liquid asset buffer the signalling effect will be reduced, as the markets will not be able to link the act of accessing the repo markets with signs of stress. We will continue with this approach.All this is good news for the British government, of course.But not so good news, perhaps, for the banks themselves:The cost to firms will depend upon how we calibrate Individual Liquidity Guidance (ILG) relative to the stress tests set out in BIPRU 12.5 and the actions firms choose in response to our new regime. For example, many firms will lengthen the maturities of their short-term wholesale funding; whilst some firms will restructure their balance sheets. Given the degrees of freedom involved it is hard to be definitive on the exact costs.However, if during the first year of the application of the new regime we assume a calibration of ILG where the firm would need to cover 60% of outflows under the Individual Liquidity Adequacy Assessment (ILAA) stresses and that firms were to lengthen the maturity of 20% of their short-term wholesale funding then we estimate that firms would need to increase their holdings of high-quality government bonds by £110bn.This would give rise to an annual cost of £2.2bn (see later tables).A self-engineered British bond bubble?
Perish the thought.
Many, many more details in the full 319-page policy statement.
Fewer details in the FSA press release.
Related links:
Back to bondage – FT Alphaville
The FSA and bondage – FT Alphaville