UK banks can use complicated asset trades with insurers to help achieve tough liquidity rules, the UK Financial Services Authority announced, cheering industry groups which had feared the transactions would be banned.
The FSA has been consulting on so-called “liquidity swaps” since July and delayed several deals, including a £1 billion seven-year deal between Phoenix and a high street bank and a multiyear trade that Lloyds Banking Group tried to do with its Scottish Widows life assurance arm. On Wednesday, it formally blessed the idea. “We see a role for these transactions on a sensible scale, provided the risks are properly identified and managed by both parties”, Paul Sharma, FSA policy director, wrote in new guidance.
In a liquidity swap, an insurer, pension fund or other asset manager will lend a bank a large portfolio of gilts or other highly liquid bonds typically for between three and 10 years. The loan of these gilts is secured by a larger pool of collateral that can include mortgage-backed bonds, infrastructure debt or other less-liquid assets.
The deals allow the bank to boost its stock of liquid assets, as required by new UK and global banking reforms, while giving the insurer higher returns than those achievable from gilts.
“We are quite pleased ... It is a big improvement over what they initially came out with. The tone has changed. There is an admission that these liquidity swaps can be a good thing”, said John Breckenridge of the Association of British Insurers.
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