MNI POLICY: BOE Guards Against Market Stalling On Brexit Votes

By David Robinson

     LONDON (MNI) - The Bank of England's supervision and the refinement of its

liquidity framework gives regulators confidence that, whatever the outcome,

looming key Brexit votes should not disrupt the financial system.

     Around the time of the June 2016 Brexit referendum the BOE stepped up its

regular liquidity insurance provision, announcing three additional Indexed

Long-Term Repo (ILTR) operations. With the first of the key parliamentary votes

imminent this time around it looks like the central bank is not even going to

step up routine operations let alone undertake emergency measures.

     The vote on the EU Withdrawal Agreement is scheduled for Tuesday. The most

recent of the Bank's monthly ILTR operations was held last Tuesday, with Stg1.5

billion allocated in an operation with a maximum size of Stg5 billion.

     UK banks have pre-positioned enough collateral at the BOE to allow them to

access around Stg300 billion of additional funding through the Bank's regular

facilities.

     In the event that these were to prove inadequate the BOE has back-up

facilities. The Discount Window Facility can respond to liquidity shocks at

individual firms and the, so far, dormant Contingent Term Repo Facility, could

provide cheap, plentiful cash.

     --OPTIONS SHOW NO DEAL HITTING STERLING

     Options pricing suggests market participants have positioned for the

possibility of another steep sterling fall if the UK departs the EU with no deal

on March 29.

     In the wake of the referendum sterling fell 7% on its effective index and

11.6% against the dollar and is currently a further 6.5% down on post-referendum

levels.

     On MNI's assessment the options market sees a 70% probability of GBPUSD

falling to a 1.1167-1.1935 range on March 30, with the top of that range more

than 7% below its current spot rate of 1.2867.

     BOE Deputy Governor Dave Ramsden said in September that while FX implied

volatilities had increased "the moves are still small relative to those we saw

ahead of the referendum" and as of Friday sterling dollar volatilities were less

than half of the pre-referendum ones.

     Even a heavy sterling fall may have no little or no impact on liquidity.

The market functioned smoothly despite a surge in trading volumes after the

referendum and this time banks appear to be pretty well insulated.

     --BANKS' FUNDING SAFE FROM CURRENCY VOLATILITY

     The BOE's November Financial Stability Report stated that "the major UK

banks have aligned the currency of their liquid assets with that of their

maturing wholesale funding."

     If dollar and sterling lending are matched to dollar and sterling funding

any heavy move in the currency pair is a sideshow from a financial stability

perspective.

     The BOE's recent stress tests showed the major UK banks comfortably met the

Liquidity Coverage Ratio, which measures liquid assets in proportion to net

outflows over 30 days under severe stress conditions and the Bank concluded they

could manage for months without any access to FX markets at all.

     In any event, it is far from certain sterling and sterling assets will be

hit hard Tuesday even if the Withdrawal Agreement is heavily defeated.

     The political process remains convoluted with each development subject to

conflicting interpretations. If a heavy defeat sees the odds of the Withdrawal

Agreement getting through parliament before the March 29 deadline lengthen the

corresponding odds on that deadline being pushed back may well shorten - muting

any market response.

     Market participants will not have long to wait to hear the BOE's assessment

of the Tuesday's events and its implications of financial stability. Governor

Mark Carney and Executive Director Alex Brazier, who is at the heart of the

Bank's financial stability and risk operations, are set to appear before the

Treasury Select Committee on Wednesday morning.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MT$$$$]