Liquidity provisions underdeveloped under Basel II, says FSA

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LONDON –Thomas Huertas, head of the UK Financial Services Authority’s (FSA) banking division, says the liquidity requirements in the Basel II rules are clearly underdeveloped and need to be addressed by regulators. Huertas, speaking on a panel at a bond investors conference in London, outlined the FSA’s two-pronged approach to liquidity requirements: that bond investors need to have a good view of money flowing into and out of their institution, including those to support conduits or structured investment vehicles, while also ensuring that they have a sufficient stock of cash or instruments that can be readily converted into cash "even under circumstances of extreme stress”.

Huertas added the FSA remains in discussions with the financial industry on this issue.

The credit crunch following the subprime crisis that peaked over the summer last year revealed weaknesses in the current liquidity requirements, which has been recognised by the regulators. This week, the Basel Committee on Banking Supervision (BCBS) published a report on the main findings from the Working Group on Liquidity (WGL) that outlined initial observations from the current period of stress. The WGL is currently conducting a fundamental review of the BCBS’s “Sound Practices for Managing Liquidity Risk in Banking Organizations”, published in 2000, with the aim of enhancing these sound practices to strengthen banks' liquidity risk management and improve global supervisory practices.

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