The Bank of England activates an emergency liquidity line before a hard Brexit | Economy



The liquidity lines that are now activated are part of already existing agreements, signed in October 2013 not only by the European Central Bank (ECB) and the Bank of England (BoE), but also by the central banks of the United States, Canada, Japan and Switzerland. Now it will be used at an especially hot moment. As happened during crises such as the 2001 jihadist attacks or the fall of Lehman Brothers in 2008, central bankers are trying to eliminate risk factors, driving away fears of a lack of liquidity. As the ECB said on Tuesday, the decision represents a "prudent and precautionary" step by the Bank of England to ensure "additional flexibility" in terms of liquidity for the functioning of the markets.

"These extraordinary measures are timely, since a withdrawal of funds that could not be met by the banking sector would put the institutions in serious trouble if they could not face the situation," says Joaquín Maudos, Professor of Economic Analysis at the University of Valencia . "Central banks are not blind and they know that a Brexit, whether hard or soft, is extremely likely in less than a month. Your responsibility is to take these precautionary measures, "adds Carsten Brzeski, chief economist at ING's German subsidiary.

The Bank of England adopts the decision to grant loans in euros as of March 13 to entities that require liquidity despite the fact that, as the entity points out, "the British banking system is sufficiently strong to deal with the shocks that could accompany the worst scenario of a messy Brexit. " This was stated by the Financial Policy Committee of the British Monetary Authority at its meeting on February 26, whose minutes have just been published. Financial stability is not the same as the stability of markets. And significant volatility in these markets is foreseeable in the case of a Brexit without agreement, added this agency.

The date of departure of the United Kingdom from the EU is officially set for next March 29, and the efforts made by the Prime Minister, Theresa May, to move forward in the Parliament the Agreement of Withdrawal agreed with Brussels have so far failed. The clock has already begun its countdown, and although the door has been opened to the possibility that Westminster forces the Government to demand an extension of the date of abandonment of the EU, both public administrations and companies have been working for months on the necessary preparations to face an exit to the brave.

"The announcement is a precautionary measure in line with the objectives of financial stability of the Bank of England," says the highest monetary authority. "With these operations, those banks and mortgage companies that meet the established requirements and are part of the monetary framework of the pound sterling may apply for loans in euros," he continues. The BoE will return the amounts in pounds to the ECB.

The BoE warns in its report that, although the possible risks for the financial stability that a disorderly Brexit would cause in the cross-border operations of financial services have been mitigated, "potential risks remain due to the lack of action of the European authorities " With this warning the institution refers to the complaint that he had previously expressed due to the lack of will of the European Commission, as the British authorities have done, to allow English banks to continue carrying out international transactions related to derivatives contracts after Brexit. At the moment there are contracts of this type for more than 23 billion euros that will not reach their maturity date until after March 2019.

Harder demands

The BoE Financial Stability Committee also warns of the risk that EU banks and insurance companies will reduce their appetite for British assets, since "they should face immediately, if the UK leaves the EU, to demand financial prudence much harder on all that sovereign debt or British entities that retain ".

It is not the first measure adopted to avoid the most damaging effects of a British abandonment of the EU to the brave. The Spanish government approved last Friday a decree with which it tried to assure that, if the hard Brexit was consummated, the normal operation of the commercial flows between the two countries would be maintained and, above all, to guarantee the interests of the Spaniards in the United Kingdom. .

In November of last year, the ECB recapitulated which banks from which countries had sent contingency plans before the first break in the history of the EU. The organism that directs Mario Draghi remembered that, as a result of the Brexit, some entities had decided to displace to the zone euro some activities, reason why the tasks of supervision fell in the BCE. "All the banks that are going to be subject to the direct supervision of the ECB will have a complete analysis," said the agency, which gave until the second quarter of 2018 for entities to submit their plans for the Brexit.

The German economist Brzeski assures that the decision by the Bank of England was expected. "This is a basic requirement to cushion any turbulence in the interbank market for any type of Brexit and, even more, if we end up having a hard Brexit. This type of tools has become standard instruments to cushion tensions, "he explains. "Prevention is better than cure. And therefore it is better to sign a prudent currency exchange agreement to avoid possible liquidity problems ", concludes Maudos.

Central banks, key to improving markets

The International Bank of Payments praises the last steps taken by the big central banks of the world to lessen the financial tensions of the end of 2018. This is explained by the agency that coordinates the central banks in its quarterly document published on Tuesday. "The course of monetary policy changed in June. The signs of a more accommodative policy on the part of the central banks in the big economies laid the foundations for a rise in the markets that reversed the December losses. Then a new phase of optimism began, "the text adds.

The body based in Basel (Switzerland) refers both to the announcement of the US Federal Reserve that it would be flexible in the face of the worsening of the situation and to the words of the head of the ECB, Mario Draghi, warning that the risks had been shifted downwards. "As of January, the markets rebounded and recovered the losses suffered since the beginning of December. With the support of the slight improvement in the economic outlook, its evolution once again depended to a large extent on the actions of the central banks ", says Claudio Borio, head of the Monetary and Economic Department of the BIS.

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