The aftershocks of last week’s convulsive Brexit vote are still reverberating through the market, and were evident yesterday across a variety of mediums and metrics. This was also reflected in the amount of cash demanded following the Bank of England’s (BoE) inaugural liquidity operation after the vote which underwent a massive swell, according to a recent Bloomberg report.
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In a recent BoE auction of funds in exchange for collateral, UK banks sought £6.3 billion ($8.4 billion), however the BoE had only allocated a total of £3.1 billion ($4.2 billion), which barely constituted half the spiking demand for cash. The move should surprise little, after a similar scenario was seen in Greece last summer, ultimately resulting in a dearth of euros on hand as Greeks worried about a divorce with the EU.
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In this instance, financial institutions experienced the same appetite for their respective domestic currency, albeit with wavering levels of collateral. The first auction resulted in mostly Level C collateral, which relative to other variants is the lowest level for such auctions and operations. More specifically, this involves residential mortgage backed securities, covered bonds and asset-backed securities – residential property value had been a point of emphasis heading into the weekend as markets tumbled.
As opposed to holding one long-term repo operation during the month, the BoE has opted for four in an effort to deal with any lags in liquidity instigated by the Brexit vote. The state of financial affairs in the UK has been quite volatile since last Friday, when a surprise ‘Leave’ vote rallied overnight, catching many markets by surprise. This in turn sent the GBP/USD to the lowest level in over 30 years.
The results also reflect initial fears from the International Monetary Fund (IMF), which warned that a Brexit could foster a potential credit squeeze if liquidity markets dry up, however the UK climate has not devolved to that at this stage. BoE Governor Mark Carney has increased the number of funding operations to avoid markets seizing up. It will remain to be seen how well the supply of liquidity can keep up with the demand.