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FSA issues plans for future banking liquidity

The Financial Services Authority (FSA) has today confirmed plans to change the way in which banking liquidity is considered by the UK regulator. Historically banks have been able to hold a large range of assets as liquidity against guarantees and money market transactions, although as we saw during the ongoing recession, many of these assets turned out to be significantly overvalued and many were actually impossible to value. So what do the changes mean?

In simple terms the changes will ensure that UK banks, over a matter of years and not immediately, will need to hold more "near cash" investments such as government securities, which is highly convenient when you bear in mind the UK government will need to refinance the massive national debt over the next few years. The issue of liquidity and collateral has been in the minds of the FSA since 2007 after the Northern Rock business model were shown to be fatally flawed when the money markets dried up and the company was unable to refinance mortgage agreements.

Whether any incoming Conservative party, if they do win the next general election, would make any changes is unclear at this moment in time but one thing is certain, the UK banking sector of the future will not be the same as the one which entered the recession.

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