Liquidity: Patchwork Response is Among Biggest Threats to Financial Services Industry

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With no global agreement around liquidity regulation expected at the G20 London summit, there is a risk that banks may migrate towards jurisdictions that are less well regulated.

Allen & Overy said today that failure to reach global agreement on liquidity regulation would be profoundly unhelpful as liquidity regulation is one of the most urgent problems of the financial crisis.

The comments come as G20 finance ministers and central bank governors prepare to meet in the UK for the main preparatory meeting ahead of the London Summit of government leaders on 2 April.

Commenting, Bob Penn, partner in Allen & Overy's Financial Services practice, said: "Among the biggest regulatory threats to the global financial services industry is the risk of a patchwork response to liquidity regulation. Given the likely cost of quantitative liquidity regulation there is a considerable risk that proposals such as those of the FSA, if not universally adopted (perhaps by approval by the Basel Committee), could cause a flight by banking institutions to jurisdictions which are less well regulated."

Part of the current response to liquidity regulation is crisis management through central provided liquidity support. The next challenge for governments and central banks will be to wean institutions off that support in a coordinated way. Further down the track there will be a seismic shift in the amount, complexity and cost of liquidity regulation for financial institutions. It is hoped that upcoming changes fix existing imbalances in how financial institution liquidity is supported and regulated.

The comments are carried in the first in a series of articles Allen & Overy is publishing in the build up to the G20 London Summit. The articles will highlight the key issues facing its clients and the market and are aimed at stimulating debate on regulatory changes that will have a fundamental and far reaching impact.

The articles will be published on a dedicated page on A&O's website, allenovery.com/G20, and will cover a range of issues, including securitisation, capital requirements for banks, risk management, and the reform of regulatory systems and international co-operation, among others.

Further information:
To receive instant alerts of our G20 coverage you can follow Allen & Overy on Twitter.com

Notes to editors:
Allen & Overy is a global law firm with over 5,500 staff, including some 500 partners, working in 31 major centres worldwide.

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Campbell Mcilroy
Allen & Overy
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