FSA wants banks to buy government bonds

by Gill Montia

Story link: FSA wants banks to buy government bonds

In a recently published paper, the Financial Services Authority (FSA) is proposing that UK banks and building societies should become less reliant on short-term funding from the wholesale money markets and increase their liquid assets.

The regulator is undertaking a consultation on methods of strengthening liquidity standards in the financial sector and specifically suggests that a greater proportion of liquid assets should be held in the form of government debt.

It also wants lenders to attract higher levels of retail deposits.

The proposed new regime is intended to eradicate the business models that led to the difficulties of Northern Rock and Bradford & Bingley, which both failed because they were highly dependent on the money markets, which froze as banks become nervous of lending to one another at the onset of the credit crisis.

Commentators have pointed out that government debt, in the form of bonds and gilts, will not provide such attractive returns as some other forms of investment and consequently the new direction proposed by the FSA could restrict lending.

It would, however, be convenient for the Government which is issuing bonds to finance the measures being taken to prevent a serious recession in the UK.

The consultation period on the proposed changes to liquidity requirements closes on 4th March and the FSA hopes to introduce the new regime in October of next year.