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Far reaching and robust - ILAS for 2009
Practical Law Legal Update 5-384-6683 (Approx. 3 pages)
Far reaching and robust - ILAS for 2009
by Jonathan Herbst and Peter Snowdon, Norton Rose LLP
| Published on 23 Jan 2009 �� United Kingdom |
The FSA publishes a consultation paper (CP08/22) on its new Individual Liquidity Adequacy Standards (ILAS).
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FSA publishes consultation paper on strengthening liquidity standards. The proposals, if adopted, impose tough new standards and would be a significant burden for certain types of financial institution. Institutions subject to the new regime would be required to carry out annual individual liquidity adequacy assessments.
In December 2008 the FSA published its much anticipated consultation paper (Strengthening liquidity standards (CP08/22)) setting out its views on the future of liquidity regulation in the UK. The proposals contained in CP08/22 are far reaching and as a result many institutions will need to significantly reshape their business model over the next few years. The FSA makes no apology for its new 'tough prudential standards'.
One of the key components of the new regime for UK banks, building societies and full scope BIPRU investment firms (excluding BIPRU limited licence and limited activity firms) is the Individual Liquidity Adequacy Standards (ILAS).
The FSA has opted for the ILAS approach as it feels that the current one-size-fits all quantitative liquidity regimes do not capture the particular circumstances of individual firms and may discourage firms from assessing and mitigating their own liquidity risk properly.
Under the FSA's proposals ILAS BIPRU firms will be required to carry out an individual liquidity adequacy assessment (ILAA) of the type and quality of liquidity resources it thinks it should hold against the sources of liquidity risk that could occur.
The different kinds of ILAA stresses are discussed in detail in paragraphs 4.22 to 4.29 of CP08/22 and generally cover:
- Idiosyncratic liquidity risk - unforeseen name-specific shock liquidity risk where the market or retail investors perceive the firm as being unable to meet its liabilities for a period of two weeks followed by a longer term stress.
- Market-wide liquidity stress - an unforeseen short-term market-wide dislocation that gradually evolves into a long-term market-wide liquidity stress.
- Combination of both idiosyncratic liquidity risk and market-wide liquidity stress.
The FSA has determined the number of sources of liquidity risk that it thinks would crystallise as a result of the stresses. These are covered in detail at paragraphs 4.30 to 4.72 of CP08/22 and include:
- Wholesale funding risk.
- Off-balance sheet liquidity risk.
- Retail funding risk.
The FSA will expect a firm to carry out its ILAA at least once a year. More frequent ILAAs are expected where the firm changes its business, strategy, nature or scale of the activities or operational environment in a way that suggests that its level of liquidity resources is no longer adequate. The FSA will review a firm's ILAA as part of its Supervisory Liquidity Review Process.
The deadline for comments on the ILAS proposals in CP08/22 is 4 March 2009.