The U.K.'s Financial Services Authority published Monday its finalized liquidity rules for banks, building societies and some asset managers, which are designed to make sure they maintain buffers of assets that they can easily sell to meet future payment obligations.
The new rules, which were proposed in December 2008, are expected to increase the safety of the U.K. banking system, but will hit banks' profits by requiring them to hold a pool of high-quality government bonds rather than using the cash to invest in riskier, but higher-yielding assets.
"The FSA is the first major regulator to introduce tighter liquidity requirements for firms," said Paul Sharma, the FSA's director of prudential policy.
The FSA has been working on efforts to strengthen its liquidity requirements since December 2007, as funding sources dried up during the early stages of the liquidity crunch that later evolved into a wider crisis.
The cost to companies from the new rules will depend on how they lengthen their funding and the way the FSA calculates the requirements.
The British Bankers' Association warned that banks could reduce their lending if they have to tie up more cash in government securities and that London's competitiveness as a financial center could be dented if other countries do not implement tougher liquidity rules.
The regulator will also introduce new requirements for U.K. branches of foreign financial institutions, many of which have, in the past, operated with waivers from the FSA's liquidity rules.
The new rules will require these branches for the first time to hold their own liquidity buffers in the United Kingdom and will only get waivers if the regulator in their home country has robust liquidity regimes and cooperates closely with the FSA.