Banks Told By U.K. FSA to Improve Liquidity Management

Britain’s banks may be vulnerable to market crises because they don’t ensure they have enough liquid assets to meet daily obligations, the U.K. Financial Services Authority said in a draft proposal.

The FSA said that it had found areas of “concern” when surveying banks’ compliance with liquidity rules. Shortfalls include the way some banks measure risks to cash flow, how they manage the stocks of liquid assets during the trading day and their management of collateral.

“A majority of firms did not give enough evidence that they actively managed their intra-day liquidity positions, especially under stressed conditions,” the FSA said on its website. “History has demonstrated” that non-receipt of a payment during the trading day “could be the tipping point” for a lender to become insolvent, the FSA said.

Regulators are seeking to strengthen banks’ stocks of cash and other liquid assets to prevent them from collapsing during a credit crunch. An exodus of deposits from Irish lenders sparked a liquidity shortfall that led European governments and the International Monetary Fund on Nov. 28 to agree on an 85 billion-euro ($114 billion) aid package for the country.

Only a “very few” of the lenders surveyed are developing their own stress-test scenarios to “establish the breaking point or the point at which outside support may be required” because of a lack of liquidity, the FSA said.

Reverse Stress Tests

The Committee of European Banking Supervisors, which encompasses regulators from across the 27-nation European Union, said in August that banks should carry out such reverse stress tests to identify scenarios that may threaten their solvency.

Stress tests for banks in the EU should include assessments of liquidity, Olli Rehn, the EU’s economic and monetary affairs chief, told reporters at a press briefing in Brussels today.

The FSA is seeking comments on its guidance until Dec. 23. The final version of the proposal will be sent to the top executives at financial companies. The regulator did not specify which lenders it had surveyed.

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