09 October 2009 News

 

JWG-IT: £9.2bn annual bill for FSA's liquidity regulations

Independent think-tank JWG-IT has said that the UK Financial Services Authority's proposal's on liquidity poses a "daunting task" for the industry with less than two months to go before the first implementation deadline given in the FSA's 400 page policy document released at the beginning of the month.

Though the Policy Statement (FSA PS09/16) has reduced the requirements for some of the 2,800 firms to which it applies, all firms face significant new systems and controls requirements with which they must comply by 1 December. This means that new risk tolerance policies, contingency funding plans and stress testing policies and procedures need to be approved by their boards by the end of next month.

JWG-IT has analysed the changes from the three previous consultation documents and discussed the findings with industry practitioners, including six financial institutions, as part of its regular Liquidity Risk Action Network (LiRAN) workshops. It says that the highest impact modifications to the regime are:

• Reporting. Some 900 data items are now specified in regulation, many of them still requiring definition and interpretation
• Liquidity risk assessment. The approach towards assessing the liquidity risk drivers that will form part of the Individual Liquidity Assessments of approximately 300 (of the 2800) firms' has changed quite considerably
• Rainy day purses. Not only do firms need to scope and define exactly what assets qualify for their Liquid Asset Buffers, they now will be forced to hold a higher proportion of their balance sheet in low-yield securities if they are not able to prove they have ‘good quality' systems and controls.

PJ Di Giammarino, chief executive of JWG-IT, said: "This is a massive piece of regulation in many respects. Many will struggle to comply with the intensive controls specified in the final regime. This is a tricky business for the financial institution and their suppliers alike. Many smaller firms simply don't have the resources to analyse the problem, yet develop a solution alone."

JWG-IT also reports that industry participation in the consultation process has waned since the original deadline, set in December 2008, was to have the rules in place by April 2009. Response levels to the second consultation in July were 30% less than the responses to the first paper.

The earliest compliance deadline is 1 June 2010 for UK domestic banks and the larger building societies. Other firms have up to 1 October 2010 to comply. However, all firms are required to have in place and switch on appropriate systems and controls on 1 December 2009. "Firms can apply for a waiver or modification to this regime, but will need to have a strong case for it," said Suhas Nayak, product director at Fernbach.

Nayak said that the FSA has "taken cognisance of the fact that firms are facing stressed market conditions, and that the quantitative requirements of the new regime (i.e. the liquid asset buffer the firm is required to hold to counter liquidity crunches) may pose additional costs to firms".

The FSA has indicated it would not enforce the quantitative requirements until the recession is over, expanded the definition of what qualifies as liquid assets, and also extended the transitional period giving firms more time to comply with this regulation.

The bill for implementation is also likely to have an impact on bank profitability, which will have a knock-on effect on customer charges and investment strategies. Implementation costs could be as much as £2.4 billion, plus an additional £9.2 billion annually. According to a report from Credit Suisse, the higher liquid buffers could result in a drop in profits by 20-25%. Shareholders may need to revise their investment strategies or portfolio compositions in an attempt to avoid incurring such losses" says JWG-IT.

"Banks now face a major increase in costs which could impact profitability. To alter liquidity ratios is getting right to the heart of a bank's business model and will result in a strategic shift in how a bank operates," said Pat Newberry, chairman of the UK financial services regulatory practice at PricewaterhouseCoopers. "International banks however, face an additional series of problems. Not only will they be required to carry more capital under the post crunch global capital framework, but if applied stringently, FSA's new liquidity rules could place a limitation on their ability to operate as a global enterprise which is a move in the opposite direction to which they have been moving for decades."