Britain's financial watchdog said on Monday that banks will have several years to comply with tougher liquidity rules aimed at ensuring the sector can navigate sudden market storms without government help.
"Phasing the period in which firms will build up their liquidity buffers should mitigate the knock-on effects to bank lending," Paul Sharma, the Financial Services Authority's director of prudential policy, said in a statement.
"The FSA will not tighten quantitative standards before economic recovery is assured."
The new rules are expected to boost demand for British gilts at a time when the government is borrowing heavily to service higher debt incurred partly from bailing out banks.
The FSA estimated full introduction of the new regime — which it says is a world first by a major regulator — would require banks to collectively increase holdings of highly-liquid government bonds by 110 billion pounds ($175.6 billion), or an annual cost of 2.2 billion pounds.
Banks warn they cannot keep lending to aid recovery from the worst financial crisis since the Great Depression and conform to an abundance of higher capital and liquidity rules.
A SOUND FOUNDATION
"We are pleased that they recognise that building a sound foundation for the economy will take some time," a spokeswoman for the British Bankers' Association said.
The UK watchdog is seeking to apply lessons from the credit crunch, which saw some banks holding too little liquidity to tide them over when wholesale money markets suddenly dried up.
The British government was forced to nationalise banks like Bradford & Bingley and Northern Rock.
The new rules would also make sure that foreign branches of banks in the UK hold enough liquidity — a lesson learnt from troubles with Icelandic banks that had customers in the UK.
The FSA said it plans to phase in the quantitative aspects of the regime in several stages, over an adjustment period of several years.
"This is to take into account the fact that all firms at present are experiencing a market-wide stress. The precise amount of liquidity that each firm will need to hold will be refined over time to ensure that the combined impact of higher capital and liquidity standards is proportionate," the FSA said.
The FSA said the phasing in of the new rules would be flexible enough to reflect new international standards once they have been agreed.
The Basel Committee on Banking Supervision is set to agree on a global liquidity framework in December which would include the use of simple ratios, one of which would set a minimum level, but implementation is unclear.
The European Union's Committee on European Banking Supervisors (CEBS) is finalising non-binding guidelines to ensure banks across the EU hold enough liquidity to survive the first month of a crisis without having to raise fresh capital.
The bloc's executive European Commission is also set to unveil its latest proposals to reform bank capital rules this month and may touch on liquidity.
At 1209 GMT, shares in major UK banks were trading mixed, ranging from a rise of 1.3 percent by Lloyds to a fall of 0.8 percent at HSBC. The European banking sector was up 0.3 percent.
