Friday, October 29, 2010

UK banks build liquidity ahead of buffer clarity

LONDON: Banks in Britain are amassing cash and bonds as the country's top financial regulator prepares to update the market on tough new liquidity rules before the end of the year.

The update from the Financial Services Authority (FSA) is unlikely to include prescriptive rules determining the size of banks' liquidity cushions, however, while the economic recovery remained fragile.

"We have said we will say something in the final quarter of this year," an FSA spokeswoman said on Thursday, Oct 28.

"We have always been clear. We won't tighten quantitative standards before economy recovery is assured."

Banks have been told to hold more liquid assets such as cash, gilts or other government bonds to prevent a liquidity squeeze at a time of stress, but have not been told the specific liquidity buffers that will be required by the regulator.

The UK economy grew twice as fast as expected in the three months to September, but with warnings of a possible sharp slowdown in the first half of next year some industry experts expect the regulator to opt for a holding statement before providing more details next year.

Most banks have already improved liquidity ahead of the new guidelines -- and are bearing the cost. Returns on the safest assets can be substantially less than more illiquid assets they may have held previously, hurting margins.

Spain's Santander said on Thursday its UK business, one of the big five retail lenders, had increased its holdings of high quality liquid assets to 39 billion pounds ($62 billion) at the end of September, more than treble the 12 billion held at end-2008.

Barclays' liquidity pool, or surplus liquidity, swelled to 160 billion pounds at the end of June, from 127 billion at the end of 2009 and just 19 billion at end-2007. Some 102 billion pounds of its end-June liquidity was cash or deposits with central banks and a further 46 billion is in government bonds or equivalent.

The top banks report third-quarter results in the next two weeks and Santander's comments are likely to increase scrutiny on the impact on margins of additional liquidity requirements, analysts said. - Reuters

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