Bank of England Issue Fresh Warnings on Brexit, Federal Reserve Tout Future Digital Currency…


This week the Bank of England released a new financial stability report where they stated that for the first time since stress tests began on UK banks in 2014, none of them currently need to bolster their capital positions. The BOE also confirmed that the UK banking system could ‘continue to support the real economy through a disorderly Brexit.’

As you might expect, the media portrayed this as good news as it cultivates the belief that the UK economy has grown in resilience since 2008. Delve deeper into the report, however, and it reveals some interesting points that media outlets did not focus on.

Firstly, the language in the report was heavily weighted on Britain’s withdrawal from the EU. Whilst they said banks could cope with a ‘disorderly Brexit‘, they were quick to counter that with a warning that the severe conditions of their stress tests would be surpassed in the event of an international economic downturn. In such a scenario, they said that banks would likely restrict lending to consumers.

A section of the report – Risks to the Provision of Financial Services from Brexit – expands on the potential fall out from leaving the EU without a trade deal. Some key points include:

  • A quarter of over the counter derivative contracts in both the UK and the EU could be affected. Outstanding contracts total £26 trillion, of which £12 trillion matures after the first quarter of 2019 (at precisely the point where the UK is due to leave).
  • EEA (European Economic Area) banks operating in the UK will need authorization to continue working in the country.
  • Risks to existing insurance contracts in both the UK and the EEA. It is estimated that £20 billion of liabilities and six million policy holders could be affected because their contract is with an insurer based in the EEA. £40 billion of liabilities and thirty million EEA policyholders could also be affected.

The term ‘in the absence of an agreement‘ runs throughout the text. One could interpret this as the bank telegraphing that negotiations will not be successful and the UK will end up exiting the union without a new trade agreement.

The time constraints of achieving a deal and adapting / implementing revised legal frameworks before leaving is also cited. Novating derivative contracts would ‘require time to prepare and execute‘; transfers of insurance contracts will be significantly increased and ‘challenging in the time available‘; addressing potential barriers to cross border data flow ‘may not be possible in the time available before exit.’

Modified legal frameworks must be completed BEFORE leaving the EU, which means by 2018 at the latest. In less than a year a finalised deal on Brexit (if one materialises) will be sent to the EU and UK parliaments for approval.

As I have written about previously, negotiations between the UK and the EU fall within the constraints of article 50. Article 50 details no specific time limit for negotiating a deal. Instead, it was Martin Selmayr, the current head of cabinet to President of the European Commission, Jean-Claude Juncker, who added the two year restriction on negotiations to Article 50. Selmayr is seen by many as the most powerful man in Brussels.

I continue to believe, based on the evidence, that the negotiation side to Brexit has been designed to fail. But that would in no way prevent the UK’s exit from the union. No deal is necessary for that to happen. This is confirmed by the European Commission themselves. If no agreement is reached, ‘the EU Treaties simply cease to apply to the UK two years after notification.’

Reuters: Amid bitcoin surge, Dudley says offering digital currency on Fed’s radar

  • “At this point it’s really premature to be talking about the Federal Reserve offering digital currencies,” he told students and professors at Rutgers University.
  • “But it is something we are starting to think about: what would it mean to have a digital currency, what would it mean to offer it, do we actually need it,” he said. “But I would be pretty cautionary” about bitcoin because “it’s not a stable store of value and it doesn’t really have the characteristics that you’d like to have in a currency.”

CNBC: Yellen – $20 trillion national debt ‘should keep people awake at night’

  • With Congress wrestling over a tax reform plan that critics say would explode the government budget deficit, Federal Reserve Chair Janet Yellen said she also is concerned over the surging level of public debt.
  • “I would simply say that I am very worried about the sustainability of the U.S. debt trajectory,” Yellen said. “Our current debt-to-GDP ratio of about 75 percent is not frightening but it’s also not low.”
  • “It’s the type of thing that should keep people awake at night,” she added.

Reuters: Fed’s Williams sees four rate hikes between now and end of 2018

  • “From today, four rate hikes through the end of next year is still kind of my base view,” Williams told reporters after an economics forecast luncheon. Williams rotates into a voting spot on the Fed’s policysetting panel next year. “We need to get from here to roughly 2.5 percent fed funds rate over the next couple of years.”

Bloomberg: Fed’s Randal Quarles Says Bitcoin Could Be Dangerous for the Financial System

  • “Without the backing of a central bank asset and institutional support, it is not clear how a private digital currency at the center of a large-scale payment system would behave, or whether the payment system would be able to function, in times of stress,” Quarles, the Fed’s newly minted vice chairman for supervision, said in remarks prepared for a Thursday conference at the U.S. Treasury Department.
  • “Digital currencies are a niche product that sometimes garners large headlines,” he said. “But from the standpoint of analysis, the ‘currency’ or asset at the center of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all.”

BBC: Wholesaler Palmer and Harvey fails with 2,500 jobs lost

  • Administrators at PwC have said 2,500 jobs will be lost with immediate effect. The firm had been in takeover talks with private equity firm Carlyle, but these fell through.
  • P&H, which is the UK’s largest tobacco supplier, had been struggling with debts and owed substantial sums to key suppliers. It is the UK’s fifth biggest privately-owned firm, and delivers more than 12,000 products, including food and alcohol. It supplies about 90,000 outlets around the UK including major chains, convenience stores, corner shops and petrol station forecourts.

CNBC: Fed’s Kaplan says rate hike appropriate in ‘near future’

  • “I believe it will likely be appropriate, in the near future, to take the next step in the process of removing monetary accommodation,” Kaplan said in an essay staking out his policy views ahead of next month’s Fed meeting. “This should be done in the context of an overall strategy of removing accommodation in a gradual and patient manner.”
  • “If we wait too long to see actual evidence of inflation, we may get behind the curve and have to subsequently raise rates more rapidly,” Kaplan wrote. “This type of rapid rate rise has the potential to increase the risk of recession.”

CNBC: The age of cash is almost over, says tech entrepreneur

  • A world without paper payments is rapidly approaching, the co-founder of the Sohn Conference Foundation said Thursday. Evan Sohn told CNBC that paying for things with traditional bank notes is increasingly dwindling as the appetite for contactless payments and digital currencies grows.
  • According to the 2017 World Payments Report, global non-cash transaction volumes rose 11.2 percent between 2014 and 2015 to reach $433.1 billion — the highest growth of the past decade and above forecasts. The same report added that debit cards and credit transfers were the leading digital instruments in 2015, though the use of check continued to decline.
  • Sohn said that he is uncertain what the principal replacement for cash will be, whether it is Bitcoin, American Express, MasterCard or something else entirely. But “the next step is moving away paper-based currencies.”

Reuters: German retail sales fall unexpectedly in October

  • German retail sales dropped unexpectedly in October, posting their deepest monthly fall in more than a year, data showed on Thursday, in a rare sign of weakness in Europe’s biggest economy.

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