First deadline tomorrow for liquidity risk action to strengthen standards in the UK post credit crunch crisis

5 January 2009

The UK’s views on how the banking system will change in 2009 is hardening fast. Tomorrow sees the first deadline pass as set out in FSA Consultative Paper 08/22 'Strengthening liquidity standards' issued on 4 December 2008, which raises the bar on the way that liquidity risks are identified, measured, monitored, reported and governed. Responses to 18% of its 97 questions will be due tomorrow with input sought on proposed measures to reporting granular liquidity information that allows the FSA to run their own firm-specific, sector analyses and market-wide stress tests, which will be used in conjunction with the BOE to maintain financial stability. Input on all questions is required by 4 March and an October 2009 implementation target has been set. PJ Di Giammarino, CEO of European banking think tank, the JWG-IT Group, commented:

“The market turbulence of 2007/2008 led to unprecedented liquidity problems at a market level. The Financial Stability Forum, International Monetary Fund, Bank of International Settlements, the Committee of European Banking Supervisors and others have identified shortcomings in current liquidity risk management practices. However, the FSA has claimed regulatory first-mover advantage by introducing new operational requirements this year.

“In an important shift, UK branches and subsidiaries of non-UK firms may not be able to rely on group liquidity arrangements unless prior permission is granted. Within this, JWG-IT analysis has found three major liquidity risk change imperatives for the banks:

• Collation of broad and granular data relevant to all assets and liabilities ‘on- demand’
• Extensive new stress testing requirements
• Senior management must be able to prove, at any time, that they were monitoring and controlling their liquidity risk as detailed by their individual adequacy standard.

“To meet these requirements, the FSA estimates operational costs to firms to be £150 - £200 million. For large firms, implementation costs are estimated to be £6-£9 million with ongoing costs of £1-£2 million.

“With deadlines set at Q3 this year, 2009 will prove a challenging year for finance, risk and technology departments as they face a new drip-feed of operating model changes. The UK has taken a position that will require firms to know much more about their business models globally. Firms should be mobilising their global programmes now and working together to establish ‘what good looks like’.”

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