On 3 April 2023, the Prudential Regulation Authority (PRA) published Feedback Statement 1/23: The prudential liquidity framework: supporting liquid asset usability (FS1/23). FS1/23 provides a summary of the responses to the Bank of England (BoE) and PRA Discussion Paper 1/22: The prudential liquidity framework: supporting liquid asset usability (DP1/22), which was published on 31 March 2022.
DP1/22 noted that the UK’s prudential framework is calibrated to ensure that banks have sufficient liquidity to continue their activities through severe stresses. Therefore, while in normal times banks maintain liquidity coverage ratios (LCRs) of 100% or more, firms may draw down their high quality liquid assets (HQLAs) even if it may mean that LCRs decline below 100%. However, the BoE and PRA were concerned that banks may be reluctant to draw on their HQLA in periods of unusual liquidity pressures, possibly to such an extent that it is limiting the benefits of the flexibility built into the framework.
Therefore, DP1/22 sought views from banks, wider market participants, and other interested partied to understand issues surrounding HQLA usability.
FS1/23 highlights the following points from the responses received:
- Most respondents agreed with the evidence presented in DP1/22 that banks are reluctant to draw on their stock of HQLA in periods of unusual liquidity pressures.
- Many respondents mentioned concerns about regulatory views on the amount of time that is appropriate to rebuild HQLA buffers following a drawdown.
- The majority of respondents suggested that future regulatory communications in a liquidity stress should clarify the extent to which LCRs can fall and the time banks have to rebuild their stocks of HQLA subsequent to such falls.
- Many respondents suggested simplifications to liquidity-related disclosures in a liquidity stress, as well as recalibrations of the LCR to account for procyclicality in the metric.
- The majority of respondents advocated greater international coordination to avoid conflicting regulatory guidance in different jurisdictions.