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Liquidity Calibration

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Published: 23rd November 2010 by William Webster

Is a two tier liquidity regime in place?

At a conference in January 2010 I warned that firms on the simplified ILAS regime could find it worked against them. My premise was as follows.

It would never be in the regulator's interest for the formula used to calculate a firm's buffer (BIPRU 12.6.9R) to produce a result that was lower than that from rigorous stress testing.

Furthermore the simplified approach left no room for negotiation but the standard ILAS approach introduced subjectivity and therefore room for compromise.

This has serious consequences.

Firms that adopted the simplified approach did so in order to keep the cost of regulation proportionate to their business. But the price is to hold more in the buffer. This increases costs, leads to less competitive retail products and could eventually be enough to put you out of business.

On 11th March 2010 the FSA issued a calibration statement. The gist was that for full ILAS firms it was premature to set an upward path on minimum liquidity buffers. Ostensibly the argument was that economic recovery was too fragile although it's pretty certain that extensive bank lobbying was an important contributor in this decision.

The quantitative requirements for simplified ILAS firms were unaffected. From 1st October 2010 to 30th September 2011 the relevant floor was 30% of the simplified buffer requirement.

On 18th November 2010 the FSA made a further statement on liquidity calibration:

 "............the FSA does not believe it is appropriate to set industry-wide transition requirements for the UK’s larger banks at this stage, although they should expect to at least meet any new international standards by the currently proposed implementation date of 1 January 2015".

This is a further concession to larger banks who have successfully argued that to exceed international standards would put them at a competitive disadvantage. But there is no mention of smaller firms.

My understanding is that as it stands the simplified ILAS approach will continue to be implemented in accordance with the transitional provisions. What does this mean for you if you are on this approach?

  1. The international standards referred to may well impose less onerous buffer requirements on the larger banks than those contained in BIPRU 12.
  2. The UK regulator is likely to calibrate the buffer of large banks in accordance with international standards.
  3. Smaller firms will continue to implement the simplified approach and will hold higher buffer levels for what is ostensibly the same liquidity risk.
  4. Smaller firms will find it increasingly difficult to compete on price in the retail market.

As it stands this is not good news if you prepare an ILSA.

Can you do anything?

If you are in a simplified firm these questions need answers:

Why have we got into a situation where for the same risk we will be holding more buffer than larger competitors?

Why can't we apply rigorous stress testing (similar to the standard approach) and if this produces a buffer that is lower than the simplified formula why can't we use the lower figure?

Why can't the FSA be more forthcoming in what it wants from stress testing in smaller firms and also provide us with some reasonable industry data whereby we can get a better understanding of the risks we face in our balance sheet?

These are best pursued through your trade association. 

Displaying 1 to 6 of 6 results in total.

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