FSA to lenders: prepare for the worst

The UK Financial Services Authority's director of retail markets, Clive Briault, warned mortgage lenders yesterday they should prepare for market conditions to worsen still further in the year ahead.

In a speech to the Council of Mortgage Lenders in London, Briault said firms should increase their liquidity and funding positions, even if it meant taking a profit cut. "Is funding readily available or is some of it in the form of undrawn facilities that are subject to material adverse change clauses? I realise holding higher levels of liquidity, with longer maturities, is much easier said than done at a time when wholesale funding is much more difficult to raise, the securitisation market has virtually dried up, and loan books sales are harder to achieve. But it would be prudent to pay a correspondingly higher price – and to forgo some profits - to secure this protection," he warned.

Lenders should also introduce more robust stress tests, to simulate long periods with only limited funding, or the effect of a bank run. "You should consider what liquidity and credit stresses would take you to the point of destruction, so that you can decide whether you are comfortable with what that implies about how you are positioning your business," Briault told lenders.

He added banks should consider whether their business models would ever be viable again, and should prepare contingency plans for winding up the business or seeking a rescue buyer in advance. "Any such plans need to be considered well before you are engulfed by a crisis, because by then it will almost certainly be too late," he said.

Briault also said current senior management are, in many cases, incompetent to deal with crises, as they had had no direct experience during the long period of market calm before this summer. Boards should consider putting management teams in place that would be better able to handle a crisis, he said.

And, while Briault emphasised that buying mortgage books was still permitted, he counselled caution. "Boards and senior management should be asking themselves whether now is the right time to be exchanging liquid cash for illiquid mortgage assets."

See also:ECB re-enters money markets as fears of volatility return
Trichet predicts tighter regulations on banks$400 billion losses on subprime, predicts Deutsche Bank
Not stressed enough