UK PRA Modernising Liquidity Policy Framework Consultation

JD Supra Finance & Banking

Published April 1st, 2026

Detected April 1st, 2026

Summary

The UK Prudential Regulation Authority published Consultation Paper CP5/26 proposing reforms to modernise the prudential liquidity framework, addressing digital banking advances and structural changes in central bank reserve supply. The consultation focuses on Pillar 2 amendments, Internal Liquidity Adequacy Assessment (ILAA) rules, and supervisory expectations. Key changes include replacing the "marketable asset risk" concept with a broader "monetisation risk" assessment, removing sovereign bond exemptions from annual testing, and clarifying expectations for central bank facility access. Comments are due 17 June 2026.

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What changed

The PRA proposes substantive changes to liquidity policy including requiring firms to assess liquidity resource composition, identify asset monetisation barriers, and conduct internal stress testing for rapid outflows within the first week of stress. The consultation replaces "marketable asset risk" with a broader "monetisation risk" assessment and removes the exemption for sovereign bonds and Level 1 assets from annual monetisation testing. Reporting requirements are streamlined by removing the monetisation actions section from the PRA110 template.

Firms must submit feedback by 17 June 2026. Compliance teams should review ILAA rules and internal stress testing procedures against the proposed monetisation risk framework, assess operational readiness to access central bank facilities including pre-positioned collateral, and evaluate whether current systems can meet the new weekly liquidity stress testing requirements. Since this remains a consultation, implementation timelines and potential penalties for non-compliance have not been finalised.

What to do next

Review ILAA rules and internal stress testing procedures against proposed monetisation risk framework changes
Assess operational readiness to access central bank facilities including collateral pre-positioning and access arrangement testing
Prepare and submit consultation feedback by 17 June 2026

Source document (simplified)

April 1, 2026

UK PRA consults on modernising the liquidity policy framework

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The UK Prudential Regulation Authority (PRA) has published consultation paper CP5/26 proposing reforms to modernise the existing prudential liquidity framework, taking into account advances in digital banking, payments and communications, and structural developments in the supply of central bank reserves. The proposals focus on targeted amendments to Pillar 2 and through changes to the Internal Liquidity Adequacy Assessment (ILAA) rules and related supervisory expectations within relevant supervisory statements.

Key proposals include:

Requiring firms to assess the composition of their liquidity resources, identify barriers to monetising assets and conduct internal stress testing to evaluate their ability to respond to rapid and severe liquidity outflows within the first week of stress. The PRA also seeks to replace the concept of "marketable asset risk" with a broader assessment of monetisation risk.
Removing the exemption for sovereign bonds and other Level 1 assets from annual testing of monetising non-liquid assets, to provide greater assurance that firms are operationally prepared to raise liquidity quickly in stress.
Streamlining reporting requirements, including removing the monetisation actions section of the PRA110 reporting template reflecting greater focus on monetisation within internal stress testing and the ILAAP and to avoid an overall increase in regulatory reporting burdens arising from the changes.
Clarifying expectations and encouraging firms to be operationally prepared to access central bank facilities available on published terms, including assessing whether they have pre-positioned sufficient collateral, testing access arrangements and ensuring operational capability. The deadline for feedback is 17 June.

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