UK PRA consults on modernising the liquidity policy framework

The UK Prudential Regulation Authority (PRA) has published consultation paper CP5/26 proposing reforms to modernise the existing prudential liquidity framework, taking into account advances in digital banking, payments and communications, and structural developments in the supply of central bank reserves. The proposals focus on targeted amendments to Pillar 2 and through changes to the Internal Liquidity Adequacy Assessment (ILAA) rules and related supervisory expectations within relevant supervisory statements.

Key proposals include:

• Requiring firms to assess the composition of their liquidity resources, identify barriers to monetising assets and conduct internal stress testing to evaluate their ability to respond to rapid and severe liquidity outflows within the first week of stress. The PRA also seeks to replace the concept of "marketable asset risk" with a broader assessment of monetisation risk.
• Removing the exemption for sovereign bonds and other Level 1 assets from annual testing of monetising non-liquid assets, to provide greater assurance that firms are operationally prepared to raise liquidity quickly in stress.
• Streamlining reporting requirements, including removing the monetisation actions section of the PRA110 reporting template reflecting greater focus on monetisation within internal stress testing and the ILAAP and to avoid an overall increase in regulatory reporting burdens arising from the changes.
• Clarifying expectations and encouraging firms to be operationally prepared to access central bank facilities available on published terms, including assessing whether they have pre-positioned sufficient collateral, testing access arrangements and ensuring operational capability.

The deadline for feedback is 17 June. 

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