PRA proposes reforms for rapid bank liquidity access

The Prudential Regulation Authority (PRA) has published proposals to ensure banks can quickly monetize liquid assets during stress events, drawing lessons from the 2023 Silicon Valley Bank collapse.

The consultation aims to modernize liquidity standards by requiring firms to evaluate their liquidity, identify barriers to asset monetization, and conduct internal stress tests for rapid outflows within a week, supplementing current monthly reporting.

A key change is the removal of an exemption for sovereign bonds and other "level 1 assets" from annual monetization testing, providing further assurance of quick liquidity generation.

The PRA also seeks to reduce data requests in other areas to prevent an overall increase in reporting burden.

Furthermore, firms are encouraged to be operationally prepared to utilize central bank facilities when necessary.

These proposals focus on enhancing preparedness without imposing additional requirements to hold more liquid assets.

These proposed updates to liquidity requirements incorporate critical lessons learned from recent years, particularly the collapses of Silicon Valley Bank and Credit Suisse in March 2023.

The PRA's focus is on ensuring that existing liquid assets are genuinely usable during a bank run, rather than mandating an increase in their quantity.

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, stated: "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.

" The reforms also acknowledge significant advancements in banking, payment, and communication technology since the last update, which followed the 2008 financial crisis.