Liquidity rules hinge on economy - FSA

By Kirstin Ridley

LONDON (Reuters) - The top financial watchdog said Thursday it was on track for introducing tough new liquidity rules for banks from the fourth quarter, but said full implementation would depend on the economic climate.

The Financial Services Authority (FSA) said the timing of the second phase of the proposals -- which will determine the size of banks' liquidity buffers -- has been cast into doubt by the worst recession in living memory.

"Even though we've said we aim to have this (the second phase) in Q1 2010, if we are still in recession, we will not be bringing in the quantitative element," an FSA spokeswoman told Reuters, noting that an industry consultation had yet to end.

"We will not be introducing anything that will make the current climate worse."

After a freeze on credit spawned a global recession and brought banks around the world to their knees and crawling to the taxpayer for cash, Britain has led Europe with proposals to address liquidity, the forgotten child of regulation.

Banks have said the "quantitative" phase, under which they will have to amass huge investments in safe securities such as gilts to help soften the impact of future crises, would be hard to achieve by the original target of the first quarter of 2010.

But they have been betting on a relaxation of the timetable for the proposals, which are expected to slice billions of pounds off the industry's annual profits -- and which were designed to force the sector to be self-sufficient in a crisis.

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