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Financial Services Authority warns it won't wait for global deal on liquidity regulation

Financial Services Authority warns it won't wait for global deal on liquidity regulation

Britain's Financial Services Authority warned on Tuesday it would not wait for new international rules on banks' capital needs, saying Britain would move ahead with its own regulations if a global deal is not struck soon.
With banking stability at the top of the international reform agenda following the global credit squeeze, Bank of England Governor Mervyn King also revealed that the central bank plans to put in place a standing liquidity facility that banks could tap for short-term cash needs.
Liquidity, or the ready cash banks need to conduct daily operations, has emerged as a key issue in the current credit crunch as banks have been fearful of lending to one another and central banks have stepped in to provide added short-term credit.
The topic dominated the first annual meeting of the British Bankers' Association in London on Tuesday where bankers and regulators considered ways to prevent a repeat of the lending freeze that led to the collapse and subsequent nationalization of mortgage lender Northern Rock. Other banks, including the Royal Bank of Scotland PLC and HBOS PLC, have resorted to multibillion pound share sales to help strengthen their balance sheets.
Bank of England Governor Mervyn King told the meeting that the global economy is "passing through the most prolonged period of financial turbulence that most of us can remember," but he stopped short of a recent assessment by the IMF that the current downturn is the worst since the 1930s, saying it was "too early to judge."
FSA chairman Callum McCarthy said ensuring liquidity was too important for regulators to delay on reforms to introduce stronger risk management measures for banks.
"The present crisis started with liquidity pressures," McCarthy said.
McCarthy said that banks need to have a clear assessment of the liquidity risks they are running and regulators could not wait for guidelines that are being developed under the Basel II protocol that has been developed to govern the capital adequacy of financial institutions worldwide.
The regulatory panel based at the Bank for International Settlements announced new measures in April to provide better protection against risky loans, including stronger risk management measures, better valuation of assets and disclosure, more liquidity and capital to cushion against off-balance sheet losses.
"We simply can't be in a position of waiting for Basel to come in," said McCarthy. "We will press ahead on a national basis because to do anything else would be inappropriate."
BBA chief executive Angela Knight told the conference that the association supported greater regulation in the wake of the global credit crisis, but warned that duplicate legislation could prove costly to competitiveness.
"Three sets of rules will be two sets too many for the international industry," said Knight. "What we do here in the U.K. must match others ... maintaining competitiveness is essential to the U.K. industry."
Bank of England governor King said he supported McCarthy's comments as he outlined plans for a new, standing liquidity facility to offer short-term credit to banks as part of the Bank of England's so-called "Red Book" to be announced later this year.
King said that emergency lending auctions by central banks, such as the coordinated action by the Bank of England and its counterparts in Europe and the United States in December, can be useful but a "more continuously available facility may sometimes be needed to avoid an immediate loss of confidence."
"We intend ... to put in place a liquidity facility that works in all seasons both 'normal' and 'stressed'," King said.
King said the bank would develop the new facility by learning from the experience of the US$100 billion special liquidity scheme it introduced in April, when it allowed banks to swap high-quality mortgage-backed securities for British Treasury bills.
That allowed banks to swap assets that had value, but couldn't be used as collateral to raise ready cash because such securities are tainted by the crisis over lower-quality securities backed by mortgages to people with weak credit.
King said a long-running scheme would need to strike the right balance between avoiding a major shock to the system and and inadvertently encouraging risk-taking by shielding financial institutions from the consequences of their actions.
The BBA, which represents 230 banks from around 60 countries that operate in Britain, also announced its own measures to ease the crisis, saying it would increase its scrutiny of banks that contribute to the setting of its global Libor benchmark for the cost of borrowing.
The cost of borrowing set by the BBA _ the London Interbank Offered Rate, or Libor _ has increased as banks have been increasingly unwilling to lend to one another amid concerns about rivals' exposure to the U.S. subprime market losses.
The BBA said it would increase checks on banks that contribute to the setting of the rate and also increase the number of banks that report borrowing rates for each of the currencies for which a Libor rate is calculated.
"These changes will further strengthen BBA Libor and the confidence of its many users," Knight said.
The BBA has been calculating Libor rates since 1985, and says they are used to set rates for financial products worth around US$350 trillion.


Updated : 2021-04-11 02:40 GMT+08:00