BOE loans banks US$3.5bn in EU vote liquidity

Bloomberg

Banks took 2.46 billion pounds (US$3.5 billion) in the first of three extra liquidity operations the Bank of England is holding this month to shore up funding as the UK considers its future in the European Union.
Governor Mark Carney is offering the cash — in exchange for collateral — as a precaution to help ensure the smooth functioning of sterling markets. Take-up compares with an average 2.95 billion pounds allocated at the previous six regular indexed long-term repo operations, according to BOE data. The next extra offering is set for June 21, two days before the referendum, and another will follow on June 28.
“A lower amount than average allotted to BOE’s ILTR is a positive sign, suggesting no scramble by banks for liquidity,” said Jason Simpson, a London-based strategist at Societe Generale SA. “There will be another operation next Tuesday that may garner a little more interest.”
There are some signs that the risk of Brexit is impacting bank funding. The three-month spread between the interbank lending rate, known as Libor, and the overnight indexed swap rate — a traditional measure of stress in the financial system — has widened to the most since 2012.
Brexit Jitters
With nine days to go before the vote, a series of polls have put the “Leave” camp in the lead, sparking increased market volatility. A measure of global stocks slid for a fourth day, while a two-week gauge of price swings in the pound surged to the highest level on record this week.
“Three-month Libor-OIS has widened as the market is now pricing a greater probability of rate cuts in the coming months as support for the “Leave” campaign has increased,” said Daniela Russell, a portfolio construction associate at Legal & General Group Plc in London. Still, “I wouldn’t say today’s take-up gives any indication of increased uncertainty or concern around the referendum from sterling monetary framework participants.”
Traders seem to be turning more regularly to the BOE for funds as financing becomes more challenging amid a contraction in the repurchase market — where debt is used as collateral to back short-term loans.
Former BOE Deputy Governor John Gieve, who was in charge of financial stability at the central bank during the run on Northern Rock Plc in 2007, said if the UK were to vote to leave the EU, policy makers would initially make it clear that they would supply as much liquidity as required.

“I would be surprised if any of our big banks got into deep trouble as a result of Brexit, and I think the BOE would be surprised too,” Gieve said.

These counterintuitive outcomes for the Bank of Japan are underpinned by partial indicators that the private sector is increasingly looking to disengage from the formal financial system. This adds to the central bank’s worries because it limits its policy effectiveness and raises questions about the institution’s credibility.
This type of disengagement is historically very rare in the advanced world. It is more common in emerging countries, especially those where institutions are weak and central banks are coopted by governments that are mismanaging the economy.
As the yen continues to trade too high for the well-being of the fragile domestic economy, the Bank of Japan will be inclined to try to do more, hoping that the government will make progress on stalled structural reforms. But rather than drive interest rates further below zero, which would be highly visible and unpopular, the central bank is likely to expand the use of its balance sheet to purchase financial assets.
The Bank of Japan remains in the business of buying time for the economy, but is doing so in an increasingly less certain fashion. Like its counterparts in Europe and the U.S., it hopes that a more forceful policy response by the government will eventually ease some of the excessive burden it has been carrying and save it from becoming woefully ineffective. Unfortunately, given the political situation, such hopes are likely to remain unfulfilled, amplifying the risk that central banks in the advanced world, starting with the Bank of Japan, could find themselves contributing to the economic malaise rather than easing it.
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