FSA finalises far-reaching overhaul of UK liquidity regulation

purch

The FSA has finally released it's New Liquidity Standards for UK Banks

http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/132.shtml

http://www.fsa.gov.uk/pubs/policy/ps09_16.pdf

According to the FT, it will mean that;

UK banks and investment firms would have to increase their holdings of cash and government bonds by £110bn and cut their reliance on short-term funding by 20 per cent in the first year.


http://www.ft.com/cms/s/0/cc8c9f4c-b19c-11de-a271-00144feab49a.html

purch

Bit more on Reuters...

http://uk.reuters.com/article/idUKTRE59427720091005

The financial watchdog said on Monday that banks will have several years to comply with tougher liquidity rules aimed at ensuring the sector can navigate sudden market storms without government help.

"The FSA will not tighten quantitative standards before economic recovery is assured."

The FSA estimate full introduction of the new regime -- which it says is a world first by a major regulator -- would require banks to collectively increase holdings of highly-liquid government bonds by 110 billion pounds

Thrugelmir

In the Reuters report both NR and B&B were mentioned as basically they ran out of liquid funds to comply with regulatory requirements. Higher reserves held in liquid assets will therefore reduce available "credit".

Any reports of the possible reduction of overall bank lending in the UK?

purch

Any reports of the possible reduction of overall bank lending in the UK?

That should be the logical conclusion, but how it ends up being reported will depend as usual on the VI

It will also increase demand for Gilts, which might upset a few more VI's too.

Thrugelmir

purch wrote: »

That should be the logical conclusion, but how it ends up being reported will depend as usual on the VI

It will also increase demand for Gilts, which might upset a few more VI's too.

I did have an afterthought that this is a neat way of withdrawing QE. By selling the banks the Gilts that were purchased by the BOE. The BOE can mop up liquidity in the markets. Overnight LIBOR is in line with BOE base more or less. So the banks no longer need liquid funds. However by holding more Gilts as capital, the banks will have to contract total lending.

The BOE is handling the financial crisis pretty well at the moment. We just need the banks to lend sensibly and we may be on the start of the road to recovery.

Generali

purch wrote: »

That should be the logical conclusion, but how it ends up being reported will depend as usual on the VI

It will also increase demand for Gilts, which might upset a few more VI's too.

Basically it is, in part, a way to force banks to buy more Government debt which is pretty handy given what is happening right now. In effect that is a tax on the banks.

This should also increase the possibility of deflation as falling lending => falling money spply => deflation.

Thrugelmir

Generali wrote: »

Basically it is, in part, a way to force banks to buy more Government debt which is pretty handy given what is happening right now. In effect that is a tax on the banks.

This should also increase the possibility of deflation as falling lending => falling money spply => deflation.

Banks will be allowed to hold "securities" from a prescribed list in countries in which they operate. So HSBC could hold US Treasury stock for example.

Reading the report it appears that a lot has been learnt from an internal audit of Northern Rock. Pity that action wasn't taken in 2004 when NR's business model was first questioned at Treasury level.

chucky

Generali wrote: »

Basically it is, in part, a way to force banks to buy more Government debt which is pretty handy given what is happening right now. In effect that is a tax on the banks.

This should also increase the possibility of deflation as falling lending => falling money spply => deflation.

or it will also push lending rates up a touch halting any potential inflation or even HPI

Thrugelmir

chucky wrote: »

or it will also push lending rates up a touch halting any potential inflation or even HPI

Banks will increase margin thats a certainty. As they will need to make more on less, and also cover the increased cost of regulatory fees to cover deposit schemes etc. Also the IMF is talking about a central reserve fund.

All the pointers are to higher interest rates in real terms, even without the added pressures of Government deficits and rebuilding bank balance sheets.

Generali

chucky wrote: »

or it will also push lending rates up a touch halting any potential inflation or even HPI

That would be the most likely outcome IMO - a less credit means less inflation, all other things being equal.

The question in my mind is whether that translates into deflation given the current very low levels of money creation, CPI and economic activity. Nothing I've seen makes me think this is becoming less likely IYSWIM.

Mr_Mumble

Generali wrote: »

Basically it is, in part, a way to force banks to buy more Government debt which is pretty handy given what is happening right now. In effect that is a tax on the banks.

The amount this new stealth tax will 'raise' seems to be dartboard stuff at the moment, from Deutsche via ftalphaville:

Increasing the proportion of gilt holdings is effectively a tax on the financial institutions which will be used to ensure greater stability. Holding government securities or equivalent assets is a negative carry trade as return on these high quality assets is likely to be lower than the banks’ cost of capital. The FSA estimates these costs to range between £1.3bn for £5.3bn for UK financial institutions.