BOE Loans Banks $3.5 Billion in EU Referendum Liquidity Push

  • Average take up at previous six operations was $4.2 billion
  • First of three additional indexed long-term repo operations

Banks took 2.46 billion pounds ($3.5 billion) in the first of three extra liquidity operations the Bank of England is holding this month as it looks to shore up funding as the U.K. 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. The take up didn’t show a rush for liquidity in the week before the vote, with the total less than the average of 2.95 billion pounds allocated at the previous six regular indexed long-term repo operations. A more telling indicator may come at the next extra offering on June 21, two days before the referendum. 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 17 basis points. While that’s the most since 2012, it’s below the peak of 60 basis points reached that year.

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. Take up at the central bank’s ILTR operations has risen compared with a year ago, when the average was about 2.2 billion pounds.

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 U.K. 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.

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