New Euro Lending Facility Will Cushion Brexit Fallout

The Bank of England (BOE) is launching a new liquidity facility in euros in the final few weeks before the scheduled date for Britain to leave the European Union (EU).

The bank said Tuesday that the weekly auctions from March 13 are a “prudent and precautionary step” to allow U.K. lenders to access euro funding. The bank already offers dollar auctions on a similar basis.

Although the prospects seem to be fading for a no-deal Brexit on March 29, the BOE’s Financial Policy Committee (FPC) said “significant market volatility” is to be expected in this scenario. Still, the central bank reiterated that the core banking system is strong enough to continue functioning properly and wouldn’t amplify the disruption.

The FPC, which was set up after the 2008 crisis to spot risks to financial stability, said that EU households and businesses could struggle to access some banking and market services in a no-deal withdrawal, ultimately raising the cost of doing business for banks that could ripple back to the U.K.

For example, while U.K. and global banks have set up new entities to do business from within the EU, they are still struggling to transfer EU clients to the new divisions, the BOE said. Only 10 percent to 20 percent of most major firms’ EU clients are ready to enter into trades, according to the central bank.

Other keys points from the BOE are:

• The FPC decided to keep the U.K. banks’ economic safety net, known as the countercyclical capital buffer, steady at 1 percent of risk-weighted assets.
• The BOE will add CYBG to its banking stress tests from 2020.
• The bank has recently enlarged through a merger with Virgin Money.
• The bank will launch a pilot cybersecurity exercise in the summer, focusing on disruption to payments systems.

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