Tom Groenfeldt attended our recent meeting of the Financial Services Club, where the new FSA Liquidity Rules were debated. Here's his report:
The FSA’s new rules on liquidity management threaten to overload banks with reporting that the regulator won’t be able to understand while missing the source of the current financial crisis, said panelists at the Financial Services Club Capital Markets forum.
Because the session was conducted under Chatham House rules, this commentary doesn’t identify individual speakers. There was broad agreement that the FSA’s new rules, which are to take effect in October, largely miss the cause of the current problems.
Because the session was conducted under Chatham House rules, this commentary doesn’t identify individual speakers. There was broad agreement that the FSA’s new rules, which are to take effect in October, largely miss the cause of the current problems.
Panelists agreed that banks are holding onto liquidity to survive.
“What kills a bank? If it loses liquidity it dies. The essence of why banks aren’t lending to banks isn’t any longer about counterparty trust. It is banks thinking they need a liquidity buffer that is bigger than in the past – if there is a run they want to make sure they can pay everything they owe on the dot.” The American program to offer insurance is a useful approach to improving liquidity.
National regulators threaten to undermine international banks because they focus just on performance within the nation’s borders.
“How can the FSA or any national regulator adequately regulate multinational institutions when all they do is look at the local part of that institution? If Asia is in trouble the FSA may ignore it but the bank with operations in Asia won’t.” Regulators will simply want to ensure a bank is self-sufficient in its home country, but that won’t work in a global work.
“If you trap liquidity in your own system, how does the UK function as an international center?” Parliament appears to want finance to shrink to the national borders, said another speaker. The FT reported Thursday that the FSA’s proposals are under fire from the financial services industry.
“The FSA's proposals would force banks to hold greater reserves of government bonds than in the past. It would also force UK subsidiaries of foreign banks to be self-sufficient in terms of funding, unless their parent companies met certain criteria.”
The FSA stressed that its proposals were subject to consultation and that it was supportive of efforts to come up with a global solution to the problem, said the FT.
At the FS Club, participants suggested delaying implementation of the rule for six to nine months.
The problems of national regulation aren’t limited to the UK.
Also on Thursday, the FT reported that American Congressmen want the Treasury to insist that banks which have received US funding invest in the US. Reacting to $8 billion of financing that Citi is arranged for public authorities in Dubai and a $7 billion investment by Bank of America in the China Construction Bank, they have raised questions about why US bailout money should be used outside the US.
Several FS Club participants said the FSA liquidity rules, which are to take effect in October, were adding cost to banking without adding much value. Banks will have a difficult time finding some of the data and it is unlikely the FSA will have staff in sufficient numbers, or with sufficient knowledge, to make use of it.
However, some vendors said that the information is more readily available than many banks think. One or two said that banks would actually derive business benefit from following the FSA liquidity regulations because this is information they need.
The capital markets session of the FS club was moderated by of PJ Di Giammarino, CEO of JWG-IT, a financial services think tank specialising in the impact of UK and European regulation. It has guides and reports on the FSA’s liquidity requirements at its web site.
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Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...
