UK regulatory focus will hold firm on liquidity risk

Banks should be running to match regulators' focus on liquidity risk management, says a report by JWG-IT

LONDON - UK regulators will "hold firm" on their commitment to liquidity risk regulation, according to a new study released by technology risk and regulatory think-tank JWG-IT.

The UK Financial Services Authority (FSA)'s proposed liquidity risk regime will go ahead, says the paper, allowing for delays, by Q1 2010. In a March 12 speech, FSA chief executive Hector Sants said "people should be very frightened if the FSA suggest a tough line".

Further evidence of a "no more Mr Nice Guy" approach was found in the FSA's December 08/22 consultation paper on liquidity risk. Expectations are that the imminent Turner Review by FSA chairman Lord Adair Turner will endorse February's European Union report by Jacques de Larosiere calling for systemic-risk safeguards across Europe.

"Banks should be pulling their experts together - treasury, finance, risk communities, business operations and technology management - to break down their internal barriers and define a roadmap that gets each bank to an integrated, global view of its liquidity risks," says the JWG-IT release.

JWG-IT says banks need to begin stronger, "extreme but plausible" scenarios for liquidity risk stress testing, fine-tuning lists of "known unknowns", or else consequences for senior management could be dire, as they are increasingly held responsible by the FSA, while the cost of tightly enforced regulation for firms could rival costs of Sarbanes-Oxley.