FSA unveils plan for new liquidity rules

New rules designed to tighten up the UK finance industry by introducing stricter liquidity tests for banks have been unveiled by the Financial Services Authority (FSA).

Banks will be given several years to comply with the new regulations, which state that only government-issued bonds will satisfy the regulator’s liquidity test.

Paul Sharma, director of prudential policy at the FSA, said that the new process will be phased in to ’mitigate the knock-on effects to bank lending’.

However, the rules are likely to meet opposition from the banks, who feel that a wider range of assets should be eligible for liquidity purposes.

Mr Sharma commented: ’We must learn the lessons of the financial crisis and we believe that implementing tougher liquidity rules is essential to ensure we are in a better position to face future crises.’

The FSA began its review into liquidity regulation in December 2007 and has said that the ’qualitative aspects’ of the new regime will be in place by December this year.

It estimates that the nation’s banks will need to collectively increase their holdings of government bonds by about £110 billion.

Under the new regulations, foreign branches of UK banks will be forced to hold enough liquidity.
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