The FSA responded to the crisis in liquidity of the financial system by issuing a long-awaited Consultation Paper in December 2008. It described its proposals as "far-reaching", stating that "many institutions will need to reshape their business model significantly over the next few years as a result."

Liquidity risk has become a hot topic in the last year, taking its place alongside more established components such as market, credit and operational risk. It has challenged the previously-held emphasis on optimising use of capital through ever-more sophisticated pricing and risk models and, for the time-being at least, torn-up the cherished assumption that the route to success was to shave Tier-1 capital to the bare minimum as a proportion of overall assets.

The challenge for banking CIOs is that, against a background of stringently restricted budgets, with very few investment dollars to spend, they need to position their systems infrastructure to address a step-change in regulatory demand and transparency. Gartner describes cash-strapped CIOs as facing flat and reduced budgets in 2009. Nevertheless, intelligent CIOs are under no illusion that profound systems and MIS implications lie ahead.

In order to make sense of this challenge, it's important to understand the mindset of the UK FSA. Out of the general agenda of attempting to respond to the Basel Committee Principles document of September 2008, the FSA also has perspective of the UK Banking crisis. The key lessons from this experience seem to be:

•  Extreme events are more common than you think: The reliance on historical data for future loss predication using statistical techniques has been discredited in the light of recent events. The statistical models employed have been overly simplistic or just not applicable to the overall financial machinery and its inherent cross-dependencies. The result seems to be that the rules of the game will have to change significantly to insulate individual legal entities and operating units from wider effects. In practice, this may mean the imposition of water tight doors to prevent large intra-group flows that are deemed against the interests of local entities and their clients. The drivers for this are the experiences of both Lehmans and Landsbanki in 2008, where regulators were powerless to prevent extraordinary flows of funds as the liquidity crisis bit.
• Liquidity is not enough: A number of additional measures will need to be put in place to provide contingency for extreme liquidity stress events. Individual subsidiaries and branches will be expected to establish such measures in order to demonstrate greater self-sufficiency in the event of an idiosyncratic or systemic liquidity shock.
• Reverse Stress Testing will be a key requirement: Banks, their international branches and subsidiaries, will need to provide an honest assessment of the stresses that are most likely to challenge their business operating model. The contingency funding plans associated with these stresses will need to be adjusted according to different levels of severity.

Clearly, the banking industry interest groups, particularly those supporting the City of London and the investment banking industry as a whole, are concerned that over-regulation of activities will curtail the sector to such an extent that it is irreparably damaged. They support the tone and the scope of the regulators consultation documents, but raise questions of practical implementation. Specifically, they fear the imposition of Individual Liquidity Guidance (ILG) as a blunt instrument that could curtail competitiveness of FSA-regulated entities and deter inflows of overseas capital upon which the UK Financial Services industry relies.

But the voices calling for light-touch regulation and market-driven regulation of the financial services industry have fallen silent.

We have witnessed a fundamental re-pricing of the international banking industry, its products and the role it plays in the global economy. And governments and regulators must respond. This will inevitably result in more intrusive regulation and a strong aversion to "capital-light" activities that, at the same time, rely on product innovation.

The recent Turner Review  has called for a fundamental review of the market risk capital regime as well as elevation of Liquidity Risk to stand on an equal footing with other well-established aspects of capital regulation. The report also opens the door to a fundamental shift in the perception of the role of regulation in the context of economic and financial cycles - the concept of over-provisioning in the good times in order to cushion the effect in bad times.

For CIOs of retail, wholesale and investment banking businesses, the demands of the regulator represent nothing new in terms of substance but do signal a call-up for more detailed transactional information and more what-if analysis around future cash flows, aligned to a more holistic model of the overall business.

An outline reporting framework for liquidity has already been published on the FSA web site so the raw data requirements are now set. Banks are aware that in normal operating conditions the new liquidity reporting regime will comprise, daily, weekly and monthly cycles - however, in times of crisis or severe stress, the reporting burden will intensify. But banks must also face the challenge of scenario engines looking at future analogies and intra-day predictions; the understanding of short-term liquidity aspects, as well as mid- to long-term.

This means that robust reporting mechanisms, with large degrees of automation must be put in place in order to anticipate a worst-case scenario. An inability to report accurately and at a high frequency, will be regarded as operationally unacceptable by the regulators. We can also expect much stronger convergence between regulatory and operational reporting requirements.

Our industry is in the process of determining what success will look like in terms of liquidity risk management in the new banking landscape. Regulation will involve a level of measurement and governance as liquidity at risk becomes as important as value at risk. Certainly, the reverberations will continue for sometime.

With budgets hardly moving, it will be the competent and responsive companies who make it through the year and also meet their regulatory requirements. The events of the past months have raised the issue of liquidity to the top of the pile. The FSA has instigated the revolution, but it may be the technologists who have to make it work. 2009 may not be a year of significant growth in the financial sector, but it will have to be one of intelligence, resourcefulness and agility.

Paul Thomas is head of business consulting at GFT UK