PRA consults on modernising the liquidity policy framework

What does this mean?

CP5/26 represents a set of targeted proposals designed to modernise supervisory expectations and embed more robust liquidity risk management. The PRA puts forward five main proposals:

• Proposal 1: Require firms to assess the composition of liquidity resources and monetisation risk.
• Proposal 2: Remove the exemption for Level 1 Assets (including sovereign bonds) from the Liquidity Coverage Ratio (LCR) operational requirements for monetisation testing.
• Proposal 3: Clarify the role of central bank facilities within the prudential liquidity framework, including an update to PRA expectations and policy on Bank of England facilities.
• Proposal 4: Require firms to monitor and assess their prepositioned collateral with central banks, along with estimating the amount of non-prepositioned eligible assets, as additional liquidity resources.
• Proposal 5: Other changes regarding ILAAP governance, risk appetite, Liquidity Contingency Plans (LCP), and funding plans, to ensure their consistency with the broader proposals.

1. Assess composition of liquidity resources and monetisation risk

The PRA proposes to amend the Overall Liquidity Adequacy Rule (OLAR) so that firms must maintain not only an adequate amount of liquidity resources, but also an adequate composition of those resources; in particular, the balance of cash and non-cash assets. The PRA additionally proposes to introduce a severe one-week stress scenario, which firms should design themselves, reflecting the firm’s specific risks.

The PRA proposes to require firms to assess the frictions associated with monetising assets and the sources of outflows for the stress event. The assessment of frictions should cover both monetisation in private markets and use of central bank facilities and include both internal and financial frictions, such as the respective accounting treatment (and associated impact on profit & loss or other comprehensive income).

The PRA also wants firms to move away from solely considering ‘marketable asset risk’ to instead assessing ‘monetisation risk,’ with greater emphasis on the firm’s ability to convert liquid assets into cash quickly, during the critical first days of a stress. This reflects the PRA’s view that recent events have shown how quickly outflows can materialise and how important operational readiness has become. The PRA is also proposing to remove the requirement to complete the monetisation assumptions section of PRA110, with the supervisory focus moving instead toward firms’ internal stress testing and internal liquidity adequacy assessment process (ILAAP) assessments. These proposals are intended to be proportionate, with simpler expectations where firms have limited monetisation risk.

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

Currently, Level 1 Assets, other than extremely high-quality covered bonds, are exempt from the LCR operational requirement for monetisation testing. The PRA proposes to remove this exemption, meaning firms would need to test monetisation of a representative sample of these assets as well. In practice, this is particularly relevant for sovereign bonds.

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

Explicit in the consultation is the PRA’s expectation that firms should consider use of regular central bank facilities, at published terms, as part of their liquidity risk management. There is an important distinction between regular operations on published terms (e.g. ILTR) and emergency assistance (e.g. discount window facility) – the latter of which is not permitted to be included in firms’ assessment of net liquidity requirements, including management actions under OLAR. (ILAA Rule 2.2).

The PRA expects firms that rely on regular central bank operations for OLAR or stress testing to be operationally ready to use them. That includes meeting eligibility criteria, signing up to facilities where relevant, prepositioning collateral, and ensuring systems, processes and governance are in place to support use in stress. It’s worth noting, prepositioned collateral must be eligible for inclusion as HQLA in the LCR to count towards OLAR.

4. Managing collateral

The PRA also proposes to strengthen expectations around collateral management. Firms would need to assess, calculate and monitor the adequacy of central bank drawing capacity generated by prepositioned collateral, net of relevant haircuts, and present this information in the ILAAP across legal entities with central bank access, taking into account currencies. Firms will also be expected to estimate the amount of additional unencumbered assets that are not prepositioned but may be eligible as central bank collateral.

This is intended to give both firms and supervisors a better view of resilience beyond the core liquidity resources required to meet OLAR, particularly in severe stresses where rapid access to central bank liquidity may be essential.

5. Other changes

The PRA also proposes clarifications to ILAA rules and supervisory expectations on ILAAP governance, liquidity risk appetite, liquidity contingency plans and funding plans, as well as clearer expectations around ALCo effectiveness and management body approval of assessments relating to prepositioned collateral.

Taken together, the direction of travel is toward a framework that places less emphasis on static reporting and more on firms’ ability to evidence credible, executable liquidity resilience.

What do firms need to do?

Firms should begin by assessing whether their current liquidity frameworks meet the PRA’s proposed expectations regarding the speed of monetisation, composition of buffers, and readiness to access central bank liquidity. For many firms, the key gap is likely to be less about headline stock of liquid assets and more about whether existing stress testing, governance and operational processes are sufficiently granular and credible for an accelerated stress:

In practical terms, firms should evaluate whether their internal liquidity stress testing adequately captures monetisation frictions during the initial days of a stress event, whether the monetisation testing of sovereign bonds and other assets is operationally robust, and their use of central bank facilities through a lens of readiness: legal onboarding, operational playbooks, collateral prepositioning, management information, escalation routes and governance all come into scope.

Firms should evaluate how they measure and monitor prepositioned collateral, central bank drawing capacity by entity and currency, and the extent to which they understand mobilisation frictions on other potentially eligible assets. This will be especially relevant for firms whose current collateral frameworks are fragmented across treasury, operations and risk functions with legal entity and geographical complexities.

Finally, the consultation points to stronger expectations around management body oversight, ALM committee effectiveness, and approval of key liquidity resilience assessments. Firms may therefore want to revisit committee mandates, MI packs and documented risk appetite statements ahead of final rules.

Next steps

The consultation closes on Wednesday 17 June 2026.

The PRA proposes a phased implementation. Phase 1 would take effect when final rules are made and would cover the removal of the PRA110 monetisation section requirement, together with the changes on central bank facilities and prepositioned collateral. Phase 2 would apply all other proposals 12 months after final rules are made, giving firms more time to adapt ILAAP, stress testing and SREP-related processes.