In the wake of the collapse of several large banks amid a rapid liquidity crunch a couple of years ago, the U.K.’s Prudential Regulation Authority (PRA) is consulting on reforms designed to ensure that banks can deal with fast-paced stress events in the future.
The regulator is proposing reforms to its liquidity standards that aim to ensure that banks can quickly monetize their liquid assets in the face of rising market stress and avoid bank failures.
Instead of increasing banks’ liquid asset requirements, the PRA’s proposals focus on beefing up banks’ preparations for episodes of stress by ensuring they can access liquidity when it’s needed.
The PRA said that its proposals aim to address lessons for regulators from the episode of market stress that arose in March 2023 — which resulted in the failure of several large banks, including Credit Suisse and Silicon Valley Bank. They’re also designed to take advantage of advances in banking, payment and communication technology since the liquidity rules were last updated in the wake of the 2008 financial crisis.
“This proposed update of our liquidity requirements takes forward key lessons we’ve learned from the past few years. We’ve focused the changes not on increasing the amount of liquid assets banks have to hold, but instead on making sure that those assets do what they say on the tin and really are usable in the event of a run,” said Sam Woods, deputy governor for prudential regulation and CEO of the PRA, in a release.
To that end, among other things, the PRA is consulting on proposals to require firms to “evaluate their liquidity, identify barriers to monetizing assets, and conduct internal stress tests on how they would react to rapid outflows within a week,” it said.
It’s also proposing to eliminate an exemption from annual testing for certain assets, including sovereign bonds and other so-called “level 1” assets, of banks’ ability to quickly raise liquidity by monetizing their less-liquid assets.
The regulator noted that it is also proposing to reduce its data demands on firms in other areas to avoid an overall increase in banks’ reporting obligations as a result of the reforms.