After the failure of its principles-based, light-touch approach to regulation, the Financial Services Authority is getting tough. By becoming the first major regulator to draw up liquidity rules early last month, the U.K. financial industry cop set a standard that until now had remained undefined — and placed itself directly in the firing line of the banking community.
"The anticipated costs of the new rules are continuing to rise and will clearly have an effect on overall business models," avers Steve Husk, who runs FRSGlobal, a Belgium-based risk management consulting firm. "We may need to ask at what point the illness is better than the medicine."
The bill that banks could face as early as next June is projected to be about £2.2 billion ($3.6 billion)per year. This cost, which represents the expected increase in the number of easily salable government bonds banks will have to hold to meet liquidity needs in the case of another widespread crisis, is an added obstacle for U.K. institutions still licking their wounds from September 2008. Foreign banks will face the same costs unless the FSA deems liquidity rules enforced by their domestic regulators adequate to grant them exemption.
The FSA is acting ahead of other national regulators and internationally coordinated efforts. The Financial Stability Forum is not expected to deliver its liquidity recommendations to the G-20 until next October. And the Basel Committee on Banking Supervision, the body tasked by the Group of 20 to advise on banking regulation, is unlikely to publish its final global liquidity standard until late next year.
Paul Sharma, FSA director of prudential policy, says fears that the new rules will make it harder for U.K. banks to compete in global circles, as well as to deter foreign banks from locating in London, are overblown. "Those who do business with these firms will consider it a benefit to locate in a more highly regulated regime," he contends. "They are now considerably more attuned to the financial health of these companies and the damage that could follow their destruction."
Still, the British Bankers Association lobbied for the definition of easily salable assets to be loosened to include corporate bonds. Now only government bonds from Australia, Canada, Japan, Switzerland, the U.K. and the U.S. qualify for the liquidity buffer.
However, phased implementation should ease fears that moving early will leave London exposed. "I’m comfortable that the flight path toward full quantitative buffer compliance is flexible enough for the FSA to adjust its regime to harmonize with what emerges from Basel," says Simon Hills, director of the prudential capital and risk team at the British Bankers Association.
Sounds like tentative support for another aggressive play by the FSA.