BoE braces for Brexit chaos

Poor old Bank of England Governor Mark Carney. Did you see him in front of the Treasury committee in Parliament this morning? He couldn’t have made his job any more difficult if he tried.

The reason?

The Bank of England published a preliminary report on how it’s preparing for Brexit. It seemed to veer into the political when it said it would make sure it could carry on lending if and when markets are stressed. Why is that political?

Well, to be charitable, the uncertainty around the result of the vote IS making markets unstable. The Bank’s job is to provide liquidity and stability.

That seems pretty straightforward

But if the Bank is suggesting that a vote to ‘leave’ would threaten the stability of the financial system, that’s a de facto argument for ‘stay’ from one of Britain’s most important financial institutions. Here’s what the Bank said in its statement:

The Bank of England is today announcing that it will offer three additional ILTR operations in the weeks around the EU Referendum. These operations are additional to the regular ILTR operations which will continue to take place once a month…As usual, the Bank will continue to offer liquidity insurance via its other facilities, including running its regular weekly US Dollar repo operations, throughout this period. The Bank will continue to monitor market conditions carefully and keep its operations under review.

An ‘ILTR’ is an Additional Indexed Long-Term Repo. If you want to understand it, think of the Bank as a pawn shop. You’re a bank yourself and you know you may need some cash. Your depositors could come calling for theirs. Or you have some liabilities that need to be repaid. Or you just like having a nice cash hoard ready when you’re not sure what the future will bring.

The BoE can give you cash on a short-term basis in exchange for all sorts of different collateral. Take down your old comic book collection, or your portfolio of asset-backed securities, or your grandmother’s China. The Bank will lend you cash against the value of those assets to tide you over to the other side of the crisis.

When the moment of anxiety passes, you return the cash to the Bank and collect your velvet Elvis paintings and other collateral.

Crisis averted! Mission accomplished

All of this implies the Bank thinks there could be chaos surrounding the vote and certainly as a result of the vote. Chaos for British trade. Chaos for the British economy. Chaos for the pound sterling. Chaos everywhere!

The Bank’s job is to prepare for a crisis (when it’s not causing one through low interest rates). You could fairly argue it’s just doing its job. But you could also argue the big institutional guns are firing on the fear campaign. Nobody wants a crisis if they can avoid it. And the way to avoid the potential liquidity crisis the Bank is preparing for is…not to leave in the first place. See how that works?

The ‘chaos and crisis’ issue obscures the fact that Britain is being forced into more financial and political integration with Europe despite not being a member of the Eurozone. Keeping the pound is a fig leaf of financial independence if you’re forced to go along with everything else in order to have access to the common market.

Let’s not forget that the Bank itself has previously highlighted the fundamental tension with Britain’s membership in the European Union. The money and the politics are inseparable. There is an inevitable aspect of ‘ever closer’ union that intrudes on British monetary sovereignty, despite the fact that the UK and other EU members are not members of the euro zone.

Here’s what the Bank said in October in a report titled EU Membership and the Bank of England (emphasis added is mine):

Closer union between euro-area member states is likely to necessitate further harmonisation of financial regulation across the euro area. It is also likely to lead to reduced flexibility and discretion of the national authorities of euro-area member states in favour of decisions and rules by the authorities of the Banking Union – the ECB, the Single Supervisory Mechanism and the Single Resolution Authority.

It is important, particularly given the weight of the ECB and of the members of the single currency within the EU, that arrangements are put in place so that the future development of the EU regulatory framework aids the necessary deepening of integration in the euro area without impairing the ability of the Bank of England to meet its financial stability objective or compromising the single market.

See the contradiction?

Britain has to stay in Europe in order to influence the EU regulatory framework so it doesn’t harm Britain’s membership in the common market. If we’re not in, we can’t keep ourselves out of the single currency or the trend toward deepening integration. But if we’re in, we have to accept a loss of ‘discretion’ when EU monetary matters require one policy from One Europe.

Do you really think Britain will exercise any negating influence over ever closer union? Will the Prime Minister’s agreement prevent that? Do you really believe the EU won’t use money power to reduce British political independence? And if you believe that, why are you still reading this?

Category: Central Banks