CP5/26: Modernising the Liquidity Policy Framework

18 Mar

Overview

On 17 March 2026, the Prudential Regulation Authority (PRA) published Consultation Paper CP5/26 setting out proposed amendments to the PRA Rulebook to modernise the liquidity policy framework and adapt to recent advances in digital banking and payments.

The proposals form part of the PRA’s broader agenda to:

strengthen liquidity risk monitoring and supervision.
support the Secondary Objective of UK Growth and Competitiveness (SCGO).
ensure the framework remains fit for purpose following market stress events (e.g. Silicon Valley Bank).

At a high level, the PRA is looking to ensure a proportionate approach for firms to demonstrate liquidity is operationally useable to mitigate risks posed by rapid deposit outflow.

The consultation closes on 17 June 2026, and a phased implementation is proposed. Phase 1 with immediate effect of rules being made and Phase 2 effective 12 months after.

Current Framework

The PRA’s liquidity framework centres on the LCR and NSFR to ensure short- and longer-term resilience, supplemented by Pillar 2 assessments of firm-specific risks. However, structural changes driven by digital banking have accelerated the speed of deposit outflows, as seen in the March 2023 bank failures. These events highlighted that actual outflows can exceed LCR assumptions and exposed weaknesses in firms’ ability to monetise assets quickly.

The PRA considers the current framework insufficient to address these risks but does not favour simply increasing liquidity buffers, which could constrain lending and hinder SCGO. Instead, it proposes enhancing Pillar 2 expectations, particularly around operational readiness and use of central bank facilities.

As the Bank of England moves to a repo-led, demand-driven reserves system, firms will need to actively manage liquidity and routinely access central bank facilities. The PRA also highlights frictions in asset monetisation and gaps in current rules, including treatment of unrealised losses, as key areas for reform.

Key Changes

The PRA is proposing a two-Phase approach outlined below.

Phase 1: Reporting modification, Central Bank facilities and collateral

Immediately following rules being agreed, firms would be required to:

Cease reporting of the monetisation section of the PRA110.
Further demonstrate use of central bank facilities as a monetisation tool for liquidity risk management, ensuring operational readiness to use these facilities.
Assess and monitor central bank drawing capacity against pre-positioned collateral.
Calculate maximum liquidity available from fully utilising pre-positioned collateral.

Phase 2: Removing operational exemption of Level 1 assets and other changes

12 months after Phase 1, firms would be required to:

Remove the exemption for annual operational testing of Level 1 Assets referred to in Liquidity Coverage Ratio (CRR) Article 10 of the PRA Rulebook.
Adjust approach to ILAAP production and Liquidity Contingency Plans (LCP) to reflect new requirements.
Firms will be required to demonstrate a severe, firm-specific stress scenario focused on rapid outflows in the first 7 days.
Firms to assess frictions to monetisation, including market constraints, operational delays, governance processes, and the impact of unrealised losses on capital.
Conduct more comprehensive internal assessments of monetisation risk.

Detailed Analysis

1. Assess composition of liquidity resources and monetisation risk

Background: The PRA does not believe the current requirements are fit for purpose to sufficiently mitigate risks presented by potentially rapid outflows, as demonstrated by the March 2023 banking turmoil.

What’s changing:

The PRA proposes to strengthen the Overall Liquidity Adequacy Rule (OLAR) by emphasising not just the amount but also the composition of liquidity resources, ensuring firms can convert assets into cash quickly enough in stress. Firms must assess the appropriate balance between cash, non-cash assets, and monetisable assets, including use of central bank facilities.
Firms will be required to demonstrate a severe, firm-specific stress scenario focused on rapid outflows in the first 7 days, reflecting risks in their business model.
Further insight on Liquidity Scenario Stress Testing can be found here: https://www.katalysys.com/insights/how-severe-should-a-liquidity-stress-test-be
A new key expectation is to assess frictions to monetisation, including market constraints, operational delays, governance processes, and the impact of unrealised losses on capital.
The PRA also broadens the concept of “monetisation risk” (replacing “marketable asset risk”), requiring more comprehensive internal assessments.
Finally, the PRA proposes removing monetisation reporting in PRA110, shifting focus toward internal stress testing, with a proportionate approach depending on firms’ complexity.

2. Remove exemption for Level 1 Assets (including sovereign bonds) from the LCR Operational Requirement for monetisation testing

Background: The current monetisation testing requirement does not apply to Level 1 Assets, other than extremely high-quality covered bonds.

What’s changing:

The PRA proposes to remove the exemption for Level 1 Assets from the LCR Operational Requirement for monetisation testing.
The PRA believes that inclusion of Level 1 Assets at least annually will improve the preparedness and operational capacity of firms to respond to a liquidity event.

3. Clarify the role of central bank facilities within the prudential liquidity framework

Background: Existing PRA rules do not clearly reflect the expectation that firms should consider central bank facilities in liquidity risk management. While current ILAA rules explicitly exclude emergency liquidity assistance (ELA) from liquidity resources used to meet the OLAR, they do not clarify whether regular central bank facilities can be included. Central bank facilities are also excluded from use as a monetisation channel in PRA110 submission.

What’s changing:

The PRA proposes to update SS24/15 to align with the Bank’s repo-led, demand-driven framework, clarifying expectations on firms’ use of Sterling Monetary Framework facilities. Firms relying on foreign central bank facilities must ensure clear and reliable access, including confirmed eligibility and terms.
Drawing on lessons from the 2023 banking turmoil, the PRA emphasises that operational preparedness is critical. Firms must pre-position collateral, test access, and ensure they can mobilise assets quickly in stress.
The PRA proposes that firms may include drawings from regular central bank facilities in OLAR and stress testing (excluding emergency liquidity assistance). However, firms must demonstrate full operational readiness, including eligibility, collateral pre-positioning, tested access, and appropriate governance and systems.
Only HQLA-eligible pre-positioned collateral can count toward meeting quantitative liquidity requirements, reinforcing the importance of both eligibility and usability of assets.

4. Managing Collateral

Background: Existing ILAA rules require firms to actively manage collateral positions and distinguish between pledged and unencumbered assets that are always available. The PRA currently expects firms with access to central bank facilities to have sufficient levels of pre-positioned collateral, and supervisors place emphasis on firms assessing the appropriate amount of collateral for use with central banks. The rules and expectations are currently limited to ensuring firms monitor and manage readiness to use collateral with central banks.

What’s changing:

The PRA proposes to strengthen expectations on collateral management and central bank drawing capacity.

Firms will be required to:

assess and monitor central bank drawing capacity (post-haircuts) against pre-positioned collateral; and,
report this across entities and currencies in the ILAAP, including access to foreign central bank facilities.

Firms must also:

calculate the maximum liquidity available from fully utilising pre-positioned collateral, providing a clearer view of additional resources in severe stress; and
estimate eligible but non-pre-positioned assets, while considering frictions to mobilisation (though these cannot count toward OLAR).

Governance expectations are proposed to be enhanced, with senior management approval required for collateral assessments.

Overall, the changes aim to improve visibility, preparedness, and resilience, while applying proportionately based on firms’ size and complexity.

5. Other Changes

Background: The proposed changes have potential to create some inconsistencies with the current liquidity framework. This requires the following changes to be made to realign the approach.

What’s changing:

Internal Liquidity Adequacy Assessment (ILAA) rules and supervisory expectations will be adjusted to reflect proposed changes above. Firms will be expected to:

maintain appropriate liquidity buffers and pre-positioned collateral;
reflect identified monetisation constraints in risk appetite; and,
strengthen governance, particularly around ILAAP preparation, asset monetisation, and use of central bank facilities.

Expectations for ALM committees and Liquidity Contingency Plans (LCPs) will also be enhanced, ensuring closer linkage between stress testing, ILAAP outputs, and contingency planning.

Second, the PRA will streamline SS24/15 by:

simplifying structure and removing duplication;
focusing guidance on monetisation risk and the Sterling Monetary Framework: and,
removing outdated EU references

Overall, the changes aim to improve clarity, reduce complexity, and embed the new framework more effectively.

How We Can Help

Firms may face a variety of challenges when defining or developing their internal risk frameworks for either or both of liquidity and funding risks, or they may require support to ensure that their risk management practices remain fit-for-purpose in the current climate. At Katalysys, we have a deep understanding of liquidity and funding risk, and the measurement, monitoring and management thereof. We have supported many clients with the development of their internal risk frameworks with respect to a range of ALM risks, and we continue to assist clients with the ongoing enhancement of their ICAAP and ILAAP and associated stress testing requirements.

We also provide liquidity risk management and liquidity stress testing solutions as part of our k-alm® suite of products. All k-alm® modules are offered as cloud-based solutions to clients to support their risk management practices as well as enhancing strategic decision-making.

Our team has supported a wide range of clients, from those seeking first authorisation to well-established firms. Whether you need:

calibrating risk appetite/tolerance;
developing liquidity risk management framework and treasury policies;
liquidity stress testing;
ILAAP or ICAAP enhancement, support or review; or,
an independent assessment of your liquidity and funding framework and processes,

We have the knowledge and technical skills to help. Some of our recent projects include:

ad hoc liquidity stress testing exercises;
k-alm® Liquidity Stress Testing implementations;
risk Management Framework review and enhancement to meet regulatory expectations;
behavioural modelling of Non-Maturity Deposits (NMD); and,
liquidity management in a multi-currency environment.

For further information please contact: