The Bank of England has told some UK lenders to triple their holdings of easy-to-sell assets in the run-up to Brexit to cope with the market meltdown forecast if the UK crashes out of the EU without a deal later this month.
Some lenders must now hold enough liquid assets to withstand a severe stress — when banks stop lending to each other — of 100 days rather than the normal 30, under rules brought in late last year by the BoE’s Prudential Regulation Authority, according to people familiar with the situation.
Banks are also being forced to model their balance sheets on the assumption that they will not be able to swap sterling for dollars, on the basis that some were shut out of being able to exchange currencies for several days during the financial crisis.
The central bank is monitoring lenders’ liquidity levels daily as the March 29 Brexit deadline nears, with some being monitored more frequently.
“The PRA is keeping a very close watch on liquidity and we’re having to dial in to two calls a day to report our position,” said an executive at one large UK bank. “We’ve got liquidity coming out of our ears.”
Experts predicted that the tough PRA requirements intended to force banks to hoard easy-to-sell assets would be eased nearer March 29 if the likelihood of a no-deal Brexit increased, so lenders could draw upon reserves they had amassed. They added that the requirements imposed so far were “sensible prudential management” by the PRA.
The BoE has already predicted “significant market volatility” in the event of a no-deal Brexit, but it has pledged that UK banks have enough capital and liquidity to weather the worst of scenarios, having £1tn of high-quality assets, according to the most recent BoE reports.
The central bank has already announced the launch of weekly auctions to ensure banks do not run out of cash in the event of a no-deal Brexit, as well as activating a special swap line with the European Central Bank.
While it has been known for several months that the PRA has ramped up banks’ liquidity requirements, the details have not been publicly shared.
The so-called Liquidity Coverage Ratio is a post-crisis global rule that measures a bank’s easy-to-sell assets as a proportion of the net cash outflows it might face over a severe stress of 30 days. It is this measure that the PRA has extended to 100 days for some institutions.
There is no universal policy for banks’ liquidity requirements, which are different for each institution, according to a person briefed on the rules. The 100-day liquidity requirement was at the extreme end of the spectrum, the person added.
Individual banks’ bespoke requirements remain confidential, but industry insiders said Barclays and Royal Bank of Scotland were among those with the greatest PRA scrutiny because of their business mix. Some consumer-focused banks, such as Lloyds Banking Group and Nationwide, have been given less stringent requirements.
Investment banking and wealth management units are seen as more vulnerable in a crisis than deposit-funded retail banks, which UK lenders have had to hive off into separately funded units under ringfencing rules that took effect this year.
The upshot of the tougher liquidity requirements is that some banks may pile into buying ultra-safe, low-yielding assets including US Treasury bonds, regulatory experts predicted.
“All of this is going to have an impact on banks’ P&L [profit and loss accounts] that is going to be non-trivial,” said one banking adviser.
Simon Hills, the director of prudential policy at banking lobby group UK Finance said: “Banks hold sufficient liquidity to weather stresses of the sort that a no-deal Brexit might bring. They will be testing themselves against a range of scenarios including dysfunctional financial markets.”
The BoE declined to comment.