FSA's new liquidity rules came into effect for Sterling Stock Banks from 1 June 2010 and for Mismatch banks from 1 October 2010.  The new rules require banks to hold a stock of high quality liquid asset buffer (LAB), which can be used to meet the firm's obligations under a stress scenario. 

A few of the sterling stock banks have been publishing their liquid asset buffer holding (that meets the FSA's rules) in their interim and annual reports. Please find below a summary of the LAB and other Basel III liquidity measures for these banks:-

* This reduction was the result of managing down short term deposits (Barclay's interim results)

** approximate

The size of the LAB is not a generic percentage or fixed number for all banks. Each bank has to calculate its liquid buffer requirement based on the bank's Individual Liquidity Guidance (ILG) and glide-path (calibration parameter) provided by the regulators. The information above is only provided to give an overview about the liquid asset buffer requirement and other Basel III parameters for some of the large UK banks.

For more information about Liquidity Risk Management, please click here

As part of the new liquidity guidelines (PS09/16), the FSA had published a Liquidity Metric Monitor (LMM) that outlines a wide range of mismatch gaps that can be used to monitor liquidity risk.  The gaps listed in the LMM are comprehensive in nature and can be used by firms to monitor and manage liquidity risk.

Inflow (assets) and Outflow (liabilities) mismatch “GAPs” across the various time-bands can be used to identify potential liquidity risks and to analyse the impact of maturity transformation on the firm’s liquidity. The inflows (assets) and outflows (liabilities) are considered on a contractual basis and conservative behavioural and stress assumptions have been applied to arrive at the various mismatch GAPs.

The mismatch GAPs are analysed based on the time-bands listed in the table below:-

The summary of the GAPs considered in the LMM are listed below:-

1)      GAP1: Wholesale Refinancing Gap (excluding lending to group and non-credit institutions)

2)      GAP2: Wholesale Refinancing Gap after sale of highly liquid collateral (i.e., GAP 1 + sale of highly liquid collaterals)

3)      GAP3: Wholesale Refinancing Gap after sale of highly liquid collateral (i.e., GAP 2 + sale of high quality collaterals)

4)      GAP4: Overall Refinancing Gap including Group, Retail & Corporate Banking flows and Lower Quality Collateral (i.e., GAP3 + Group, Retail & Corporate Banking flows and Lower Quality Collateral)

5)      GAP5: Overall Refinancing Gap plus withdrawable stress  (i.e., GAP4 + callable stress)

6)      GAP6: Overall Refinancing Gap plus withdrawable stress  plus off-balance sheet stress (i.e., GAP5 + off-balance sheet stress)

7)      GAP7: Impact of downgrade triggers (i.e., GAP6 + impact of 2 notches downgrade )

A trend analysis of the mismatch GAPs in conjunction with the firm’s risk appetite can be a useful tool to monitor, track and manage liquidity risk. It can also serve as a guide to set internal limits and assist in liquidity pricing.

Please refer to the article on Liquidity Risk Management - Mismatch GAPs for more details.

Once the liquidity buffer requirement is calculated, firms must make plans to purchase eligible liquid assets based on their specific glide-path and Internal Liquidity Adequacy Assessment (ILAA).

To meet the regulatory requirements, firms must only include assets from the options provided below:-

1) high quality debt securities issued by a central government or central bank

  Only securities issued by the following central government or central banks are eligible:-

a) central government or central bank of an EEA State; or

b) central government or central bank of Canada, Australia, Japan, Switzerland or USA

   Additional conditions:-

The securities must also satisfy the following conditions:-

1) At least two External Credit Assessment Institutions (ECAI) must have accessed the central bank or government in question as having a credit rating associated with credit quality step1 (as listed in the table below); and

2)  denominated in the currency of the country in question; or denominated in Canadian dollars, Japanese yen, sterling, Swiss francs or United States dollars

 2) securities issued by a designated multilateral development bank (from the list below)

3) reserves in the form of sight deposits with a central bank

Additional conditions: Please refer to the eligible central banks and additional conditions listed for the securities above

4) investments in a designated money market fund (ONLY for simplified ILAS firms)

Want to know more about how to calculate the liquid asset buffer (LAB) requirement? Please check out this link.

Arthur Pates has recently joined Katalysys as a business consultant and specialises in banking systems. He has more than 24 years of experience providing consulting and technology solutions to banks like Security Pacific Bank, Barclays, Bre Bank and Banca di Roma. He has a sound knowledge of end-to-end banking operations and concerns, including Regulatory Reporting, Trade Finance, Basel II, MiFID and migration. He holds a BA Jnt. Hons. in Modern History and Politics from Liverpool University.