U.K. banks, building societies and securities firms may be allowed to use government-backed bonds to comply with new liquidity rules, potentially lessening the cost.
Under new provisions to bolster financial firms’ liquidity, the Financial Services Authority said in December that banks and securities firms would need to cut reliance on wholesale markets and instead hold more government securities, at a potential cost of 5 billion pounds ($7 billion). That may include bonds that now have government guarantees, an FSA official said today.
“It’s something we’re still considering,” said Paul Sharma, the FSA’s director of wholesale and prudential policy, at a conference in London today. “We don’t have an answer yet.”
Banks have borrowed the equivalent of more than $150 billion using government guarantees since October, a figure that may rise as much as $500 billion this year, according to mtn-I, a research firm that tracks the market. Prime Minister Gordon Brown said on Jan. 19 that the government will back hundreds of billions of pounds of securities hurt by market turmoil, adding to a 250 billion-pound credit guarantee announced in October.
Broadening the range of assets lenders and investment banks must hold may reduce the cost of the rules.
“I would have a requirement to hold more but with a generous range of assets rather than a smaller amount with a narrow range,” said David Rule, the chief executive officer of the International Securities Lending Association, who also spoke at the conference today.
The U.K. government plans to issue a record 146.4 billion pounds of bonds this year to finance bank bailouts and economic- stimulus measures, according to a study by Morgan Stanley released this week. In turn, banks’ demand for so-called gilts could help keep servicing costs low, the report said.
The FSA’s review of liquidity plans comes as global authorities are struggling to fix regulation in the midst of the worst financial crisis since the 1930s.
While the FSA will hold off making financial companies comply with its measures until “normality is returned” to the economy, companies must get liquidity-monitoring systems in place as soon as possible.
New rules about systems and controls, such as ensuring that liquidity flow across an international banking group is monitored, may come into force as early as the third quarter of this year, Sharma said today.
The proposed rules also demand that U.K. units of foreign banks have enough liquidity. The British government is bailing out savers in the British units of failed Icelandic banks.
“This is a sea-change,” Simon Hills, executive director at the British Bankers’ Association, said today. “We need to give assurances that we can manage liquidity across borders. Supervisors in a host country need to talk to home regulators, and colleges are the key route here.”
So-called colleges of supervisors operate on an ad-hoc level in Europe. Regulators from countries in which a bank operates are meant to talk with the supervisors from the bank’s home country.
Brown wants colleges of supervisors to work on a global level, and proposals are meant to be thrashed out before the next meeting of the G-20 group of nations in April.
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