Here’s something we missed on Monday: the FSA’s liquidity bondage for banks is no longer — or at least, it’s not for a while.
As the UK financial regulator announced on Monday:
The Financial Services Authority (FSA) published its enhanced liquidity regime in October 2009. This introduced both tougher qualitative and quantitative standards for firms.
At that stage the FSA said that it would not tighten quantitative standards before economic recovery is assured given that all firms were experiencing a market-wide stress. The FSA committed to giving a further update in the first quarter of 2010.
The FSA believes that it would be premature to increase liquidity requirements across the industry at the current time. This position will be reviewed later on in the year with a further announcement in Q4, 2010.
So that’s potentially bad news for UK gilts, which banks would have been forced to hold under the liquidity guidelines, along with other government bonds. But it’s possibly good news for UK banks, which are now free(er) in terms of liquidity constraints, at least until Basel III is implemented.
As a point of interest, one of the theories behind UK banks not lending (despite QE and various other incentives to do so) is that they were being extra-cautious ahead of the FSA’s liquidity plans. You can see some of that caution in the below chart, from Deutsche Bank analysts Jason Napier and David Lock.
It shows Lloyds’ liquidity buffers at or around the end of December 2008, March 2009, September 2009 and December 2009. Over 2009 alone, the bank increased its liquidity buffer by 150 per cent:
That pattern is one that’s been repeated for other British banks, including RBS, which increased its liquidity reserves from a low of £90bn to £171bn at the end of last year. Barclays, meanwhile, spent £650bn funding its liquidity pool, which increased from £43bn to £127bn between 2008 and 2009.
So, now that the banks are freed (albeit potentially temporarily) from the FSA’s liquidity bondage, will those buffers start dropping?
The Deutsche Bank analysts seem to be suggesting so:
We continue to expect tighter standards on liquidity, leverage and magnitude and quality of capital held. But the deferral of PS09/16 implementation – with another update only due in 4Q10 – gives more confidence on a pragmatic regulatory approach. Banks most funding sensitive in the UK in our view are LBG (Buy, TP70p) and RBS (Buy, TP50p).
Related links:
Deconstructing the ‘buy’ case on UK banks – FT Alphaville
FSA finalises liquidity bondage - FT Alphaville
Back to bondage – FT Alphaville