The Bank of England is to offer more euros to UK banks to avoid a potential cash crunch in the post-Brexit period and warned that other European Union (EU) countries are not fully prepared for the possible impact on the financial system should the UK exit without a deal being agreed.
The BoE said most financial stability risks in Britain from a no-deal Brexit had been mitigated, and UK banks had sufficient liquidity to support their operations for months without needing to tap markets. Governor Mark Carney expects this to cushion the impact on growth and avoiding the worst of the potential chaos if no transition is agreed within the next three weeks.
By contrast EU businesses should brace for higher borrowing costs and financial turmoil as its authorities have done less to prepare for a no deal scenario and so could cut their economies off from many of the crucial financial operations based in London.
Nonetheless as a precaution the BoE will launch a new weekly auction of euros from next week to ensure that banks based in the UK can borrow in Europe’s single currency, following on from a similar announcement last week about weekly sterling operations.
ECB ready to lend
The European Central Bank confirmed that the eurosystem of central banks will stand ready to lend pound sterling to euro area banks, if needed. EU banks hold 15% of UK bank debt and 10 %of UK government bonds.
The UK remains due to exit the EU on March 29, but prime minister Theresa May is holding out for further concessions from Brussels, and has resisted pressure to rule out the possibility of a disruptive, no-deal Brexit. However, she has also conceded the possibility of a delay to Britain’s departure.
The BoE and ECB are activating currency swap lines set up following the financial crisis of 2008-09.