Could you substantially reduce the vulnerability of banks by tightening liquidity requirements? Would this minimize the risk of a new financial crisis?

The reason we ask is the recent announcement of the new liquidity requirements by the British Financial Services Authority.

General policy
The FSA wants banks to have an increased portion of their total assets in liquid form. This way, a better balance between risks and buffers would be achieved.

A number of UK banks already had liquidity policies that were similar to the one currently proposed by the FSA, and generally weathered the crisis better than other banks. Reason for the FSA to make it into a general policy for the entire financial sector, says FSA executive Paul Sharma in Dutch newspaper het Financieele Dagblad.

For the new policy to be successful, though, it can only be applied when the crisis is fully over. The FSA expects this to take a couple of years still.

Dutch central bank
Likely, the British organization was inspired by the Dutch central bank (DNB), who has been enforcing strict liquidity requirements since 2002 – both for debts and assets.

According to the Dutch requirements, the average value of the combined assets should always exceed the average value of the combined debts. A big difference with other countries is that the DNB itself determines these average values. The UK is now opting for a similar approach.

Countries that are currently working to establish liquidity requirements do so ahead of upcoming international agreements.

The Bank for International Settlements (BIS) – an international organization which fosters international monetary and financial cooperation – is in the process of drawing up a set of international liquidity standards.

Your opinion…?
By tightening liquidity requirements when banks have had a chance to recover the current crisis, the chances of banks tumbling into a new crisis are greatly reduced. Sounds good, or…? What do you think?