Divyang Shah, Senior IFR Strategist
The BoE even introduced a new liquidity facility (ECTR) to alleviate bank concerns over liquidity at times of stress to comfort them that the CB is ready to play its lender of last resort role.
Once again the BoE’s FPC is backing banks to reduce their buffers, this time pointing out that major UK banks are already exceeding the requirement that they should have, which is a Liquidity Coverage Ratio of a 100% by the beginning of 2018.
Under EU implementation of the Basel standard the guideline is for a ratio of 60% by the start of 2015 so it’s easy to see that banks are excessively risk averse when it comes to liquidity.
But the problem is that banks are unwilling to reduce how much liquidity they have not wanting to get caught out in a shock. UK banks are holding higher LCR out of choice and its proving to be difficult to change behaviour that was born out of the turmoil that followed Lehmans bankruptcy.
Given the BoE’s bias toward getting banks to lend it seems unlikely that a QE exit for the BoE is any closer and we remain biased toward playing against the adjustment in money markets over the last few sessions.
We have suggested receiving 1y1y GBP at 1.10% as well as a narrowing in the Dec4/Dec5 spread from 57 ticks.
