Modernising the liquidity framework for banks and building societies - speech by Phil Evans

Given at University of Leeds, Cloth Hall Court, Leeds

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Published on

17 March 2026 In this speech, Phil Evans sets out the PRA’s proposals to modernise the UK’s liquidity framework. He explains how targeted, proportionate reforms strengthen firms’ ability to monetise assets and improve operational readiness, drawing on lessons from the March 2023 banking turmoil.

Speech

Modernising the liquidity framework for banks and building societies

It is an enormous pleasure to be here today in Leeds. As many of you will know, the Bank of England is making great efforts to modernise its approach. One part of that broad effort has been to make the Bank of England more representative of the society we serve. We now have over 200 people working in our Leeds office and are aiming to build that to 500 by 2027. This is an exciting opportunity for us, not least because Leeds, as a major financial centre in the UK, hosts tens of banks, building societies and credit unions, with financial services alone in the city valued at nearly £7billion. The confidence in the city, and the region, is palpable.

I’m very happy, in that context, to be able to collaborate with the excellent Business School at the University of Leeds to be able to speak to you today.

In the part of the Bank of England that I work in – the Prudential Regulation Authority (PRA) – another key part of our modernisation drive has been to take on a secondary objective to further the UK’s growth and competitiveness (SCGO). My focus today will be to discuss how we have updated our liquidity framework, in a way that supports safety and soundness of the firms we supervise, but sympathetically to the SCGO [1].

To take account of the SCGO, we need a clearer understanding for how our actions as regulators affect the growth and competitiveness of the UK financial sector, and the wider economy at large. That work is ongoing, and we have recently established an academic network to help us deepen our understanding, which our colleagues at the University Business school here in Leeds have been engaging with. This thinking is particularly important because even where we are primarily pursuing initiatives to shore up our primary safety and soundness objective, as is the case for the liquidity framework I cover today, we want to do it in a way that doesn’t damage, and ideally enhances where we can, competitiveness and growth.

A framework for the SCGO

Our high-level framework for assessing the SCGO has three main foundations:

• Trust in the system and its resilience so that firms, domestic and international, have the confidence to invest.
• Efficiency, meaning things like less red tape and lower costs for firms.
• And responsiveness, meaning creating a dynamism that encourages innovation across the financial services sector directly, and the corporates they support when lending. In turn, these foundations support growth and competitiveness by improving domestic productivity, attracting financial sector business to the UK, and supporting the ability of UK firms to sell their services abroad. Together, these last two features amount to maintaining the UK as a major global financial centre.

The changes to the liquidity framework that I am going to cover today primarily work through the first two foundations.

We’ve had a lot to say about the efficiency foundation before, both in terms of cutting costs for firms and increasing the speed with which the PRA can act. Not least because it is probably the area where we have announced the greatest number of initiatives. This includes our strong and simple regime for small firms, or processing applications for models faster, or dialling back on reporting, or removing the bonus cap regime and the associated wider remuneration reforms. In all of these areas we have been able to remove inefficiencies, and therefore lower costs for firms, without dialling back on safety and soundness.

So, I will spend a moment explaining a little more about the trust and confidence channel, because it is closely related to the meat of the liquidity proposals I will cover today.

Trust and confidence

Trust is just essential in our liquidity framework. That in turn is built on maintaining confidence. Why do trust and confidence support the SCGO?

Put simply, if you have trust and confidence, then you believe in the resilience and fairness of the financial system. And with that, you are much more likely to invest, either as an investor or as a firm choosing where to expand your business. That is because uncertainty is lower, and there is very good evidence of a strong link between uncertainty, confidence and growth. This incentive to invest could be for firms already based in the UK to expand their business, knowing the returns to their investment are less likely to be depleted by the economy weakening or the regulatory goalposts being moved in an unfair way. It could also be an incentive for foreign firms to come and base some of their activities in the UK. And of course, investment in jobs and in buildings all pay taxes and contribute to the UK economy.

Let me give you one nice example. My colleague in financial stability Rhiannon Sowerbutts has an interesting research paper. She shows that where, across the globe, regulation is set by an operationally independent regulator, you tend to get a more stable financial system, as proxied by lower levels of non-performing loans. Regulatory independence, much as it does so for monetary independence, anchors confidence in the system. And that confidence in the system lets you achieve better outcomes.

The proposals we are publishing today are aimed, at heart, at modernising the liquidity framework with a view to underpinning confidence in the system. But what it also illustrates well, I think, is that it is perfectly possible to take actions to modernise and maintain standards, to underpin confidence across the system, but in a way that is sympathetic to the need to be proportionate and sits subtly with firms in a way that doesn’t significantly add to the costs and frictions they face. And thereby supports the SCGO.

So, what are we proposing?

Post SVB liquidity reforms

Almost exactly three years ago there was a significant banking stress in the US, the shape of which we had not seen before. The enduring Global Financial Crisis image of ordinary people queuing round street corners to withdraw money from their banks had been replaced by the modern world. The very visible old style bank run might have unfolded gradually over a few weeks. But now bank runs can seemingly be invisible and happen in a matter of mere hours [2], fuelled by social media which is now used by just over half of UK adults to get their news. In 2023, Silicon Valley Bank in the US had a deposit outflow rate of 85% over 2 days, compared with Northern Rock having an outflow rate of 20% in 4 days in 2007. It turned out that the combination of digital banking operating 24/7, mobile-enabled deposit movements, and the amplification effect of social media can now lead to depositors withdrawing money from their banks at rates that far exceeds our previous expectations, and in ‘non-traditional’ hours. And these trends are not going away any time soon, which means our prudential framework needs to catch up and keep pace.

The framework we currently have for liquidity is designed to protect against bank runs. It is partly, but not totally, built around two main internationally agreed liquidity standards. These are called the LCR and the NSFR. The Liquidity Coverage Ratio requires banks to hold a sufficient stock of high-quality liquid assets in normal times to survive a significant short term stress scenario lasting 30 days, combining idiosyncratic and market wide shocks. The Net Stable Funding Ratio intends for banks to maintain a stable funding profile over a longer period, including limiting any overreliance on flighty short-term wholesale funding.  Each of these two existing measures makes assumptions about how fast certain liabilities of banks, over the different respective horizons, are withdrawn from the bank in stress. But neither build in the unprecedented speed and scale of March 2023. [3]

The natural first response to events like this might be to reach for requiring banks to hold ever greater levels of liquid assets by toughening the LCR and NSFR, to try and ensure firms can pay out to depositors at all times. But this would amount to requiring firms to self-insure for extreme events that may never be particularly relevant risks to their business model. And very high levels of self-insurance have costs for firms which may affect their ability to service their customers, especially when borrowing from the Bank of England against appropriate collateral is now commonplace. If not appropriately calibrated, which is hard given these two main requirements are relatively blunt tools, this approach could leave banks holding significantly more liquid assets and reducing the capacity or willingness to lend. This could have negative economic consequences on the PRA’s objective for competitiveness and growth.

Furthermore, there is not even a guarantee that just by bluntly insisting on holding more liquid assets we would even save a bank in that situation. What matters most is confidence in firms because perceptions of bank solvency and other factors are often at play, and holding more liquid assets may buy some time, but it will not always solve for other risks. Depositors withdrawing money from a bank can reflect a loss of confidence and trust in the banking system, so instead we want banks to be prepared in a broader sense for risks that are relevant to them and their business models. In turn, depositors would then have confidence that their money is safe.

The two existing international standards do enhance confidence in the financial system and do still provide an important line of defence. As we have reviewed our framework in the wake of the events of SVB, we think they remain the central measures for banks to maintain appropriate resources for stress scenarios. And we remain committed to closely aligning to these international standards, as an important element of maintaining a competitive environment for banks to thrive. But we don’t think big changes unilaterally to the UK implementation of them is the best response to the SVB events.

Instead, we have been rethinking how to supplement the existing liquidity standards in a way that builds trust and confidence in the system and enhances safety and soundness without choking off lending. In response, the PRA has today proposed targeted, proportionate reforms to modernise the liquidity framework. I’ll run through the main elements and how they modernise the framework to underpin confidence. The key point is that we have proposed an approach that works with the grain of each firms’ business model.

Strengthening firm specific stress testing

A central principle in our updated approach is that we think firms should be better prepared to utilise the liquidity they have access to, by building capabilities in internal stress testing and liquidity planning. In line with existing PRA rules, firms already have a suite of stress testing capabilities that are designed to directly address risks associated with the scale and complexity of their business model. The changes we are making build on these capabilities, but with a view to addressing stresses that have more speed and severity than firms may have been used to in the past.

• This means asking that firms develop a stress testing scenario where the outflows are sudden and severe, with outflows occurring in the first few days of the stress, taking account of the kinds of factors observed in the 2023 stress.
• To require firms to actively assess the types of challenges that would delay or prevent them from meeting withdrawals immediately as they fall due. Firms need to be able to mobilise very liquid resources, either from the private sector or through facilities at central banks, with speed. And they should consider the extent of anything that could cause a friction in mobilising their resources quickly, such as operational delays in payments and settlement, internal governance processes or the type of market or facility they intend to use. Where potential frictions would prevent firms from responding to a rapid stress, they will need to work on lessening the frictions.
• Firms should use the information this exercise generates to determine the appropriate adequacy and composition of the types of assets they hold in their liquidity buffers in practice. This means thinking about the balance between assets that are immediately available for meeting outflows and those assets where there could be some delay to use, even if they are marketable assets.
• Overall, the stress tests firms run, that are chosen by firms themselves to reflect their own business models, should capture well the speed and scale of modern retail and corporate withdrawals, the impact of social media driven communication, and operational bottlenecks in monetisation. In turn, that will underpin confidence and trust in firms. Now some firms may say “we already do this and we are operationally ready.” This kind of response would be absolutely fine where firms are able to demonstrate that, and it would mean very low adjustment costs for those firms already operating in the modern world. The supervisory conversation between the PRA supervisors and firms will be key to build a common understanding of how well-placed firms are in practice, but where they are already in good shape, we will not be asking them to do new things for the sake of it.

Where that is not the case, however, we would expect firms to respond. That is most likely to involve improved readiness to monetise the assets they already hold, although it could in some cases lead to more liquid resources being held.

So, circling back to our overall objective of building trust through confidence in the banks and safety and soundness across the financial system, we are setting a level playing field so that depositors and investors can have that trust. But we are doing so in a way that doesn’t generally add undue additional new burdens on most firms and thereby is supportive of our SCGO aims.

Enhancing operational readiness to use central bank facilities.

The other main part of our proposals involves firms’ readiness to use central bank facilities. The Bank of England has made great progress in normalising the regularly available ‘open for business’ use, by firms, of our lending facilities. This has involved removing any lingering stigma, and this lending should not be thought of as emergency central bank intervention. It is more expanding or contracting our balance sheet to supply the reserves firms want against good quality collateral. Cementing this view, there is no presumptive order between firms making use of their own private sources of liquidity, and central bank lending, in normal times. This regularisation of the use of central bank facilities means that it is important that firms are ready to use central bank facilities without unnecessary friction. Without minimising these frictions, we cannot be sure that banks are equipped to use our facilities when needed.

Central bank lending of course also plays an important role in a stress. In addition to firms’ own resources provided for by the LCR, there is, and has always been, a role for the authorities to use their balance sheets to provide more liquidity when needed in a stress. And because of the frictions that firms face in markets, or inside firms themselves in executing the monetisation of their assets, they need to be willing and ready. And firms themselves may not always want to use their liquidity buffers because they want to demonstrate their strength during a stress. Any resulting deleveraging and fire-sales will amplify a stress when our aim is to use policy to dampen it.

Although overreliance on central bank facilities can distort market incentives, we appreciate central banks do play a central role in supplying liquidity through their regularly available open for business lending. The PRA’s liquidity framework for banks and building societies should appropriately reflect the existence of central bank lending through its regularly available facilities, by which we mean the STR, ILTR, OSF and DWF. And it should set clear expectations on how the facilities should be used to ensure there is an appropriate balance within bank liquidity risk planning.

Recently [4] the Bank of England has been pursuing a number of related and overlapping developments to the way it supplies reserves, as it reduces the size of its balance sheet under quantitative tightening. The key point is that our central bank facilities will be routinely used during business as usual to access highly liquid reserves. Alongside these developments, the PRA has published statements on how the facilities should be directly reflected in firms’ liquidity planning. [5]

The most important element is that firms should be able to rely on our regular facilities, and they can build that into their stress testing. But the quid pro quo is that firms need to be operationally ready to use these facilities for any stability benefits to be realised. Our new policy sets out that firms should be monitoring the collateral positioned ready to use in central bank facilities and have suitable processes and governance controls in place in order to be able to rely on using them at pace if that is needed. We have observed in the past that delays in decision making at firms can lead to them not being able to benefit from the central bank facilities, and being able to make decisions swiftly is key to minimising the frictions and challenges I discussed earlier.

What we can be confident of is that collateral prepositioning has been a success for regular liquidity risk management. The drawing capacity of firms now stands at more than £450bn. This reflects significant efforts across firms, supervisors, and central banking colleagues to enhance this preparedness, and plays a key role in enabling the PRA to take a proportionate approach to the existence of potentially rapid modern liquidity runs. We continue to encourage firms to continue efforts to pre-position collateral, as necessary. International banks need to be prepared to operate in international markets, meaning these are expectations that we must have for all banks operating in the UK.

Conclusion

I’ve argued that building trust and confidence in the financial system by enhancing resilience and readiness to face a stress, without generating significant costs firms or restricting growth on balance sheets, is an essential aim. It underpins safety and soundness, and it supports our efforts on the SCGO. This can be achieved when we look to modernise elements of our prudential framework in a proportionate way.

That is exactly what we are aiming for with the modernisation of our liquidity framework. And that in turn should continue to build confidence of investors that banks are well prepared to manage evolving stress scenarios. And to the extent that depositors respond to the perceived resilience of firms, enhancing the liquidity framework to more dynamically respond to the stresses designed by the banks themselves may help to forge a new confidence in the management of the risk.

You might say, to use a modern phrase perhaps more suited to the younger generation, the “glow up” we are giving to the liquidity framework will prepare it for a more modern financial system.

I would like to thank Charlotte Barton, Doina Sova and Sam Welland for their help in preparing this speech. And David Bailey, Nat Benjamin, Hywel Dawes, Charlotte Gerken, Ana Lasaosa, Will Rawstorne, Vicky Saporta, Jumpei Satomi, Sam Woods, Jack Worlidge for very helpful comments.

1. For a broader discussion of the liquidity environment for the financial system as a whole, please see Getting liquidity where it is needed − speech by Nathanaël Benjamin | Bank of England
2. Overview and key findings of the 2025 Digital News Report | Reuters Institute for the Study of Journalism
3. Loughborough lecture: Banking today - speech by Andrew Bailey | Bank of England
4. Learning by doing − speech by Victoria Saporta | Bank of England
5. PRA statement on Short Term Repo (STR) facility | Bank of England

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