March 4, 2009

Comments on the UK FSA “Strengthening liquidity standards”
Consultation Paper (08/22)
Japanese Bankers Association
We are an industry association that represents the Japanese banking sector. Ourmembership consists of 144 Japanese banks and 48 foreign banks active in Japan.
We are pleased to take this opportunity to comment on the United Kingdom’s
Financial Services Authority (FSA) consultation paper (CP08/22) “Strengthening
Liquidity Standards”. Some of our member banks operate as branches or subsidiaries inLondon, because of its attractiveness as an international financing centre with aproportionate and principle based approach to regulation. The liquidity regime proposedin CP08/22 is likely to have a material impact on our member banks’ businesses inLondon and will certainly reduce the attractiveness of London as a financial centre.
We fully understand that the FSA wishes to strengthen its current liquidity
standards. However, we are concerned about the FSA proposals which we believe may
preemptively hamper current efforts to achieve international convergence in the area ofbanking supervision practices.
From a general perspective, we believe that one of the main lessons to be learned
from the current financial crisis is that any initiative that needs to be taken to enhancefinancial supervision must be coordinated on a global level. This is particularly true inthe area of liquidity risk management as internationally active banks manage liquidity
risk on a global basis.
Particularly, we are concerned that fragmentation of the regulatory landscape in thearea of liquidity would have a negative impact on the global financial system.
For example, at first, globally available liquidity will be reduced by driving
national regulators to strengthen liquidity standards in each country from the standpointof reciprocity.
Secondly, self sufficiency standards will require both of UK banks and foreign1banks to compliant with the UK standards regardless of different business models,causing London market less popular in the global markets.
Thirdly, we are also concerned that the proposed standards would hinder anappropriate global liquidity allocation for each banking organisation and, moreover, thatit they would encourage regulatory arbitrage and threaten financial instability. The“Principles for Sound Liquidity Risk Management and Supervision” which the BaselCommittee published in September 2008 accepts both centralised and decentralised
structures for liquidity management.
Fourthly, such fragmentation may result in a reduction in the availability of credit
in the UK and other areas, which would not be helpful in the context of the current
global recession and that would cause procyclicality effect due to excessive liquidity
burden especially in a severely stressed period.
Fifthly, we are concerned that the cost of liquidity requirement for branches or
subsidiaries of foreign banks would increase significantly so that it would be difficult
for foreign banks to remain operations in London.
Finally, the FSA proposals are not in consist the with G7 statement on February
14th, which expressed that the G7 remains committed to avoiding protectionist
measures that would only exacerbate the downturn.
Furthermore, we would like to propose that regulatory reporting requirements for
global financial institutions as well as regulatory requirements for waiver andmodification to foreign banks should in any event ideally be managed and coordinatedthrough one unified global body (or College of Supervisors). This is more efficient fromboth the regulatory bodies’ and the financial institutions’ points of view. Moreharmonisation and convergence in the globally coordinated regulatory framework canbring plenty of benefits, and we encourage regulatory authorities to cooperate andharmonise their supervisory practices in relation to liquidity. Globally coordinatedsolutions, supported by working agreements reached in Colleges of Supervisors, canpromote holistic approaches that avoid the fragmentation of liquidity pools.
We do believe that multilaterally developed prudential regulatory initiatives,including those in the area of the liquidity regulation, through the discussion in the levelof the Basel Committee are most appropriate.
Therefore, we request the FSA to restrain from introducing the new liquidity
requirements into the UK regulation in a way that would conflict with international

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standards. The introduction of new regime should not be rushed through before aninternational consensus has been formed. In light of the magnitude of the impact of thisconsultation paper, we hope that our comments above would assist the FSA in its further
work on this matter.

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