UK¡¯s FSA liquidity reporting regime - latest price tag to top ¡ê2 billionUK’s FSA liquidity reporting regime - latest price tag to top £2 billion
Industry needs to collaborate to contain escalating cost of implementation
London – 20 April 2009. The results of an FSA survey of 34 firms have shown that the potential incremental costs for UK banks to implement the new liquidity reporting regime could be over £2.4 billion.
Consultative Paper (CP) 09/13: Strengthening Liquidity Standards 2, released last week, suggests in chapter seven that the 661 firms who are significantly affected will need to devote resources to change their systems and hire more staff to cope with the new requirements. This could cost from £49,000 each for the 58 building societies through £3.3 million for 157 UK banks, up to £7.4 million for 244 full-scope investment firms. In addition, 202 UK branches of foreign banks are looking at costs of £542,000 each. On an ongoing basis, banks will need to spend between £517,000 and £775 million, depending on how much crisis reporting is required. Comments on the CP are due by 15 July 2009 and the revised reporting must be implemented by March 2010.
JWG-IT, the neutral FS think-tank, has analysed the figures and confirmed the implications with the FSA. Although the FSA stated that the figures do not take account of the size and complexity of banks, it is clear that an implementation challenge of this scale is unprecedented and that the 09/13 estimate overwhelms the estimated costs of between £870 million and £1 billion from one year ahead of MiFID implementation. The findings suggest that the FSA and the firms need to urgently investigate the basis of these calculations to confirm accuracy and, if the figures prove correct, to work together to ensure that the regulatory burden is not so financially debilitating.
Industry experts have already warned that the FSA’s new rules threaten to overload banks with reporting that the regulator won’t even understand. In short, the FSA are asking for granular quantitative liquidity data, on a daily basis when necessary. However, they believe the information they are asking for to be part of most firms’ existing liquidity risk management processes and that the cost of reporting should be merely a modest increase.
In December 2008, CP 08/22: Strengthening Liquidity Standards estimated costs for the liquidity risk regime to be £150 - £200 million. Consultants’ estimates have put the real costs at two to three times that number, but few predicted that the FSA’s own survey would reveal a cost increase that is this many times greater than their original estimate for the entire liquidity risk regime.
PJ Di Giammarino, CEO of JWG-IT, comments: “The FSA’s analysis of the impact these new standards will have on the firms has been prepared quickly and should obviously be taken with a pinch of salt. There are clearly different interpretations of “modest”, depending on which side of the risk fence you sit on. But, whatever your perspective, these cost estimates should serve as a wake-up call.”
“Despite the fanfare and deadlines announced back in 2008, there are many banks that have used the FSA’s questionable timeline to delay their liquidity risk projects. When we talk to banks, uncertainty about who owns the programme, and where the resources are going to come from, reigns.”
Di Giammarino continues: “The debate is no longer about whether we need capital ratio brakes or liquidity airbags; this global financial services vehicle needs both. There is little competitive advantage for a bank to monitor liquidity risk better than another - the industry needs global standards to comply with this new regime better, faster and cheaper.”
“In implementing MiFID, we learned the tremendous costs of leaving ‘known unknowns’ about implementation detail unresolved for too long. Given the depletion of back-office resources and the number of business issues still on the plate, this is now an executive-level issue. The CFO, Treasurer and Chief Risk Officer should be working together to define what these new standards mean to the board and sharing their conclusions with their peers in other banks.”
The newly-named Financial Stability Board is charged with quickly defining a global standard for liquidity reporting. The US and the European Union have also indicated that they will review their liquidity standards this summer.
Di Giammarino continues: “The FSB faces an early challenge and can act decisively to demonstrate that it is more than a paper tiger by defining the global standards by which liquidity will be measured.”
JWG-IT’s liquidity risk action network (LiRAN) is conducting a survey of top firms’ implementation readiness and will be running implementation workshops in May 2009.
For background information on liquidity risk requirements see: www.liquidity-risk.info orwww.jwg-it.eu where a full analysis report is available to download.
About JWG-IT Group Limited
JWG-IT is the only financial services industry think-tank to facilitate collaborative work to resolve industry issues created by regulatory change. Based on a working model started in 2005, JWG-IT has established strong relationships with EU administrators, leading firms and companies. It is neither lobbyist nor consultancy and revenues are restricted to membership and event fees and content sales. The JWG-IT Think-Tank is designed to help members and participants manage regulatory-driven change better, quicker, cheaper and with less risk. JWG-IT launched the customer data management group and the liquidity risk action network in 2008. For more information, see www.jwg-it.eu.
For immediate release
PJ Di Giammarino, pj@jwg-it.eu, +44 (0) 7811 430 503
Louisa Excell, Louisa.excell@hotwirepr.com +44 (0) 20 7608 2500
