(5 min read)
This article outlines the proposals contained in the Prudential Regulation Authority’s consultation paper CP5/26, which sets out significant changes to how UK-authorised banks and building societies must manage and demonstrate their liquidity. The catalyst for these proposals was the collapse of Silicon Valley Bank and other lenders in March 2023, which exposed weaknesses in existing rules: banks held nominally liquid assets that could not be turned into cash quickly enough. The PRA is responding by tightening the rules on operational readiness, not just asset holdings. The consultation closes imminently on 17 June, and firms are encouraged to engage with the consultation on the key proposals we detail further below.
At a glance
What has been published?
A consultation paper proposing significant changes to how UK-authorised banks and building societies must manage and demonstrate their liquidity, though will not require firms to hold more liquid assets
What is the driver?
The collapse of Silicon Valley Bank (SVB) and other lenders in March 2023 exposed weaknesses in existing rules: banks held nominally liquid assets that could not be turned into cash quickly enough. The PRA is responding by tightening the rules on operational readiness, not just asset holdings.
Who is affected?
All PRA-authorised banks, building societies, and designated investment firms subject to liquidity requirements. International banks with UK branches or subsidiaries should also take note.
Key impacts
Firms must demonstrate that liquid assets are genuinely usable in a crisis, run 7-day outflow stress tests, be operationally ready to access central bank facilities, and embed stricter collateral monitoring.
Key dates
- Consultation closes 17 June 2026.
- Phase 1 rules apply immediately on enactment (expected late 2026). Your firm must cease PRA110 monetisation reporting; must treat central bank facility readiness as an active requirement; and must begin monitoring and assessing collateral drawing capacity.
- Phase 2 rules apply 12 months later. The enhanced ILAAP framework comes into force, including the 7 day outflow stress scenario, Level 1 asset monetisation testing, analysis of monetisation frictions, and updated governance expectations.
Background and policy context
The existing framework and its limits
The liquidity rules were designed in the aftermath of the 2008 financial crisis, and assume that assets classified as liquid can be converted into cash. The events of March 2023 exposed a critical flaw in this assumption. Silicon Valley Bank experienced deposit outflows so rapid, driven substantially by social media commentary and the speed of digital transfers, that the bank was unable to monetise its government bond portfolio quickly enough to meet obligations. Similar pressures affected Signature Bank and, to a lesser extent, Credit Suisse.
The PRA draws a direct lesson: holding assets that are nominally liquid is not the same as being able to use them in a crisis. The consultation paper is the PRA's formal response to this lesson, and it represents the most significant structural revision to the UK liquidity framework since the post-2008 reforms.
The PRA's policy objectives
The PRA is explicit that it does not intend to require firms to hold more liquid assets. Increasing requirements would constrain lending and conflict with the PRA's secondary competitive growth objective, which is the statutory duty to support growth and international competitiveness of the UK economy. Instead, the PRA's focus is on three things:
- Operational usability: ensuring that liquid assets can genuinely be monetised (i.e. converted into cash) in time to meet outflows in a real crisis scenario.
- Central bank integration: embedding the Bank of England's Sterling Monetary Framework (the ‘SMF’) repo-led, demand-driven reserves system into firms' liquidity planning as a tool to be used routinely, not as an emergency backstop.
- Supervisory intelligence: improving the quality of information the PRA receives about firms' liquidity positions by moving from standardised reporting to firm-specific internal assessment and stress testing.
Proposals
Proposal 1: Composition of liquidity and monetisation risk
- The PRA proposes that firms must maintain an adequate composition of liquidity resources, not just an adequate amount. This would require revision of the Overall Liquidity Adequacy Rule (‘OLAR’) in the PRA handbook. A large stock of high quality liquid assets (‘HQLA’) is not sufficient if the firm lacks the operational infrastructure to monetise those in a stressed market at speed.
- The paper suggests introducing a firm-designed severe outflow stress scenario focused on the first week of stress. Parameters are for each firm to determine, reflecting its own business model.
- Firms will be required to assess the frictions associated with monetising their liquid assets, for example, access to central bank facilities, or internal governance delays.
- The PRA proposes to replace the existing concept of "marketable asset risk" with the broader concept of "monetisation risk" in ILAAPs, supported by updated supervisory expectations.
- The PRA also proposes removing the monetisation actions section of the PRA110 reporting template, with immediate effect from implementation of the rules.
Proposal 2: Remove exemption for Level 1 Assets
The LCR operational requirement currently requires firms to test, at least annually, their ability to monetise a representative sample of liquid assets through sale or simple repo in accepted markets. Level 1 assets in (including central bank reserves, central government bonds, and certain other sovereign-backed instruments), are currently exempt from this requirement.
- The PRA proposes removing this exemption, so that all liquid assets are subject to monetisation testing under the LCR operational requirements. Firms would therefore need to demonstrate in practice that assets such as sovereign bonds can be monetised when needed, rather than assuming they are automatically available in stress. This change aligns the UK framework with the Basel LCR standard.
- In practice, firms will need to test bond portfolios that have historically been treated as self-evidently liquid, including end-to-end operational processes, counterparty arrangements, and settlement capability.
- Firms must also consider whether factors which as unrealised losses could affect their willingness and ability to execute a sale in stress, as part of the monetarisation testing expectations.
Proposal 3: Clarify the role of central bank facilities within the prudential liquidity framework
- The PRA proposes to clarify that firms may include drawings from central bank facilities in their OLAR and internal stress testing where those facilities are regularly available on published terms. Emergency liquidity assistance remains excluded.
- Where firms include central bank facilities in their liquidity resources or stress scenarios, they must be operationally ready to use them in practice. This includes participation in the Sterling Monetary Framework, pre‑positioning eligible collateral, testing or making live use of facilities, and maintaining systems and governance capable of enabling rapid access.
- Where firms intend to rely on foreign central bank facilities in stress, they must confirm that those facilities are available, operate under clear and transparent eligibility criteria, and are accessible on known terms.
Proposal 4: Managing collateral
The PRA highlights that developments in digital banking, payments and communications increase the risk that liquidity outflows may be larger and faster than in previous stress events, potentially exceeding firms’ assumptions. Pre positioned collateral at central banks is therefore viewed as an important additional source of liquidity resilience beyond OLAR.
- The PRA proposes to strengthen expectations on collateral management to improve firms’ understanding of their central bank drawing capacity in severe stress.
- Amendments to ILAA rule 7 would require firms to assess and monitor the adequacy and size of central bank drawing capacity against pre‑positioned collateral, after the application of haircuts.
- Firms would be required to present in their ILAAP document a consolidated view of drawing capacity across all legal entities and central banks, including foreign central bank access and relevant currency constraints.
- Amendments to ILAA rule 11.3C would require firms to calculate the total liquidity available if they drew in full against all pre‑positioned central bank collateral, to provide a complete picture of liquidity headroom beyond OLAR.
- Firms would also be required to estimate the amount of unencumbered, non‑pre‑positioned assets that could be eligible as central bank collateral, together with a realistic assessment of the frictions to mobilising those assets. These assets would not count towards OLAR or internal stress testing.
- The firm’s management body would be required to approve the assessment of pre‑positioned collateral as part of the ILAAP document.
Proposal 5: Consequential and streamlining changes
- The PRA proposes to clarify ILAA rule 3.1 to require firms to maintain robust strategies, policies, processes and systems to ensure both an appropriate composition of liquidity buffers and, where relevant, sufficient pre‑positioned collateral.
- The PRA proposes to update expectations for Liquidity Contingency Plans to ensure that risks identified through stress testing and the ILAAP are clearly reflected in operational contingency planning.
- The PRA proposes to strengthen governance expectations around ILAAP preparation, OLAR review and the effectiveness of ALM committees, drawing on supervisory observations of good practice.
- The PRA also proposes to remove legacy EU regulatory references, including the EU LCR Delegated Act and EBA SREP guidelines, and replace these with PRA rulebook provisions and updated supervisory expectations.
The proposals are structured in two phases reflecting their implementation complexity and urgency.
- Phase 1 rules apply immediately on enactment (expected late 2026):
- Cease PRA110 monetisation reporting
- Treat central bank facility readiness as an active requirement
- Monitor and assess collateral drawing capacity
- Phase 2 rules apply 12 months later, with an enhanced ILAAP framework proposed, including:
- 7 day outflow stress scenario
- Level 1 asset monetisation testing
- Analysis of monetisation frictions
- Updated governance expectations
Next steps
Firms are reminded of the imminent closing date of the consultation, which is 17 June 2026. We are happy to talk through the proposals further, and also discuss implementation once final rules are enacted. If you have a query that you would like to discuss, please get in touch with one of our specialists.
