Banks will be made more liquid and less leveraged - FSA

The FSA will continue to tighten financial regulation until the UK banking system becomes more liquid and less leveraged, says FSA managing director Sally Dewer.

Firms will be forced to hold higher levels of liquid assets than before the crisis to counter "painfully obvious inadequacies" in financial institutions' management of liquidity.

However, Dewer says changes to required liquidity levels would be brought in gradually so as not to destabilise economic recovery

"We are looking for our new regime to produce a significant further strengthening over coming years. In the long term, the system certainly needs to become more liquid and so less leveraged.

"There will be no more ‘heads the banks win, tails society loses," says Dewer.

"Although we are deadly serious about seeing liquidity levels rise over the years, we are not in a hurry to do that through the next few quarters. Until economic recovery is robustly established we must be patient about the rate at which we expect liquidity levels to increase."

Countering criticism from those within the industry opposed to tighter regulation due to cost factors, Dewer adds: "Clearly, the costs to put in place more robust systems for liquidity risk management and to build up liquidity buffers, are substantial. Such costs will be most significant for those firms which have had the least satisfactory arrangements up to this point.

"And it is amongst such firms, that senior management have shown themselves most exposed and uncomfortable - due to their insufficient grip on the issues - in the face of our more informed and demanding supervisory oversight."