CP5/26: modernising the liquidity policy framework

Three years after the banking stress events of 2023, including the failures of the Silicon Valley Bank (SVB) and Credit Suisse, the Prudential Regulation Authority (PRA) has proposed further reforms to the UK liquidity framework through CP5/26 – modernising the liquidity policy framework.

The proposals are designed to protect banks and building societies against rapid deposit outflows in a digital banking environment, where funds can leave institutions at unprecedented speed. The existing UK liquidity framework, centred on the Liquidity Coverage Ratio (LCR), is largely calibrated using assumptions drawn from the global financial crisis, when liquidity stress crystallised over longer periods.

Recent events have shown that these assumptions no longer fully reflect the reality of modern liquidity risk. Deposits can now be withdrawn at scale within hours, fundamentally changing the nature of liquidity stress and firms’ operational preparedness requirements.

The PRA has highlighted two key lessons from the SVB failure:

• The scale and speed of deposit outflows significantly exceeded those observed during the 2008 financial crisis.
• Firms were not always operationally capable of monetising securities quickly enough to meet acute liquidity demands.

In SVB’s case, deposit outflows of up to 85% over a two‑day period were observed, compared to 20% over four days for Northern Rock in 2007. This event demonstrated that existing liquidity requirements, while formally met, did not ensure preparedness for fast‑moving stress scenarios.

CP5/26 aims to address these shortcomings by strengthening the framework’s focus on monetisation risk and operational readiness.

The proposals: what are the changes and how material are they?

To remain resilient under modern liquidity stresses, firms must be able to liquidate their assets quickly and reliably. CP5/26 therefore places greater emphasis on how liquidity management frameworks assess and manage monetisation risk.

Although monetisation risk is addressed within the LCR, PRA110 reporting and ILAAP requirements, the PRA considers these measures insufficient in isolation given recent experience.

The PRA’s key proposals include:

• Reassessing the composition and usability of liquidity resources.
• Introducing a new seven-day internal stress scenario that captures sudden and severe early-day outflows.
• Removing the exemption for Level 1 assets from the LCR operational requirement, requiring firms to test the monetisation of a representative sample of all liquid assets at least annually.

This reflects an explicit regulatory shift towards ensuring that liquidity buffers can be usable in practice, not just compliant on paper.

Alignment with the Bank of England’s operating framework

The proposals also align with the Banks of England’s (BoE) move towards a repo-based framework, following the transition away from quantitative easing. BoE are keen for firms to use their balance sheet as a tool for avoiding liquidity mismatch, with operations such as the short-term repo, used to smooth liquidity gaps and the indexed long-term repo, used to provide a more stable liquidity buffer.

What will be the impact of CP5/26 on firms?

The PRA has indicated that it will apply proportionality in supervising the new requirements. However, all PRA regulated firms will be impacted.

While larger firms may already have the operational capabilities needed to adapt, supervisors may still expect enhanced internal stress testing, more granular timelines and closer integration of liquidity stresses into day-to-day treasury management.

Mid-sized firms may experience the most significant impact, given the need to:

• Run new internal stress scenarios demonstrating credible monetisation of all HQLA.
• Evidence operational readiness to access central bank facilities.
• Enhance ILAAP stress testing and reporting with limited additional resources.

Smaller firms should also expect to update their ILAAPs and be prepared for increased supervisory engagement on liquidity preparedness through the PRA’s ongoing assessment process.

Stress testing: What will a good 7-day stress look like?

The PRA has deliberately avoided prescribing specific outflow rates, placing responsibility on firms to design scenarios that plausibly reflect their funding structures and business models. However, it is reasonable to expect:

• Material increase in assumed early day deposit outflows, particularly for instant access and concentrated fundings.
• Stress timelines that meaningfully challenge firms’ ability to monetise assets quickly.
• Realistic assessments of access to central bank facilities, with appropriate operational considerations.

What is the expected implementation timeline for CP5/26?

CP5/26 has not set out a formal implementation date. However, based on prior PRA consultations, it is reasonable to expect the final policy within 6-12 months.

The PRA has indicated that it will adopt a phased approach:

• Simplified changes, such as removing the monetisation section from PRA110 and extending monetisation testing would apply immediately, once the rules are finalised.
• More significant changes would be subject to a 12-month implementation period.

On this basis, firms should expect these requirements in ILAAP updates ahead of formal implementation, with supervisory discussions likely to commence earlier.

Key takeaway

CP5/26 marks a clear and deliberate shift in the PRA’s approach to liquidity regulation, from static compliance towards demonstrable operational resilience. As liquidity stress now unfolds at digital speed, firms must demonstrate that liquidity buffers can be accessed and monetised in practice, not just held on balance sheet. Firms that embed these capabilities early will be best positioned to meet supervisory scrutiny and manage fast‑moving liquidity risk with confidence.