PRA consults on modernising liquidity policy framework for UK banks
The Prudential Regulation Authority (PRA) has published a consultation paper proposing amendments to its liquidity policy framework for CRR and non-CRR firms. The changes aim to modernise rules on internal liquidity assessment, stress testing, and regulatory reporting.
Strengthening internal liquidity rules
The proposed amendments to the Internal Liquidity Adequacy Assessment Part introduce explicit definitions for 'central bank facilities', 'drawing capacity', and 'pre-positioned collateral', clarifying their role in firms' liquidity resources.
Rules reiterate that firms must maintain adequate liquidity in amount, quality, and composition to meet liabilities, explicitly prohibiting the inclusion of emergency central bank assistance in this assessment.
The framework also mandates robust strategies, policies, processes, and systems for identifying, measuring, managing, and monitoring liquidity and funding risk across various time horizons, including intra-day.
These must be tailored to business lines, currencies, and legal entities, ensuring appropriate allocation mechanisms for liquidity costs, benefits, and risks.
Rethinking stress scenarios and reporting
The consultation paper details enhanced requirements for liquidity stress testing.
Firms must now assess frictions in monetising assets and the source of outflows during initial stress days.
They are also required to calculate additional liquidity resources available by fully drawing against all 'drawing capacity', ensuring operational readiness for central bank facilities if assumed.
Stress test results must inform internal limits for liquidity risk exposure and risk appetite.
Regulatory reporting is also modified, exempting firms from completing 'Monetisation Actions' rows (290-303) of PRA 110 data items for specific regulated activity groups.
Refining the liquidity toolkit
This update is crucial for aligning UK prudential rules with evolving market practices and international standards.
However, the detailed amendments, particularly around 'drawing capacity' and stress testing, introduce significant complexity for firms.
While enhancing resilience, the implementation burden for both CRR and non-CRR entities will be substantial.