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10 March 2019

Financial Times: BoE tightens bank liquidity buffers before Brexit

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The Bank of England has told some UK lenders to triple their holdings of easy-to-sell assets in the run-up to Brexit to cope with the market meltdown forecast if the UK crashes out of the EU without a deal later this month.

Some lenders must now hold enough liquid assets to withstand a severe stress — when banks stop lending to each other — of 100 days rather than the normal 30, under rules brought in late last year by the BoE’s Prudential Regulation Authority, according to people familiar with the situation.

Banks are also being forced to model their balance sheets on the assumption that they will not be able to swap sterling for dollars, on the basis that some were shut out of being able to exchange currencies for several days during the financial crisis. The central bank is monitoring lenders’ liquidity levels daily as the March 29 Brexit deadline nears, with some being monitored more frequently.

“The PRA is keeping a very close watch on liquidity and we’re having to dial in to two calls a day to report our position,” said an executive at one large UK bank. “We’ve got liquidity coming out of our ears.”

Experts predicted that the tough PRA requirements intended to force banks to hoard easy-to-sell assets would be eased nearer March 29 if the likelihood of a no-deal Brexit increased, so lenders could draw upon reserves they had amassed. They added that the requirements imposed so far were “sensible prudential management” by the PRA.

All of this is going to have an impact on banks’ P&L [profit and loss accounts] that is going to be non-trivial Banking adviser The BoE has already predicted “significant market volatility” in the event of a no-deal Brexit, but it has pledged that UK banks have enough capital and liquidity to weather the worst of scenarios, having £1tn of high-quality assets, according to the most recent BoE reports.

A BoE spokesperson: “We have for several months been holding firms to increased liquidity requirements in order to mitigate Brexit risks.” [...]

Full article on Financial Times (subscription required)

© Financial Times

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