Banks should develop stress-test scenarios to assess whether they have sufficient liquidity to withstand a crisis, the U.K. Financial Services Authority said in a draft proposal.
Banks should also “analyze ‘surplus’ liquidity potentially trapped in foreign branches,” the FSA said in the proposals posted on its website today.
Regulators are seeking to strengthen corporate governance at banks to prevent a repeat of management failures blamed for contributing to the financial crisis. An exodus of deposits from Irish lenders sparked a liquidity shortfall that led European governments and the International Monetary Fund on Nov. 28 to agree on an 85 billion-euro ($111 billion) aid package for the country.
“Good” senior asset and liability management “committees have developed reverse stress-testing scenarios” for liquidity “in which the business model becomes unviable,” according to the proposal.
The FSA is seeking comments on the proposals until Dec. 17. The regulator will send the final version out as a letter to the top executives at financial companies.
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