Swap agreement between ECB and Bank England: what will happen if there is a hard Brexit?

It is a reality that when things are not going well or there are uncertainties and fears in financial markets in a currency, it causes problems to banking entities that are not part of the monetary zone in order to finance their assets linked to that currency, basically because they do not have direct access to the foreign central bank that issues it. On the other hand, if your country’s central bank has a swap line with the foreign central bank, it can supply domestic banks with liquidity in the currency they need without having to resort to their foreign reserves.

Already in 2008 the financial system limped and several of the world’s major central banks (the Fed, the ECB and the Bank of England) agreed to exchange currency to ensure that banks could continue to access dollars, euros and pounds. This agreement was born with a temporary idea, but between one thing and another came to stay.

In 2011, the Bank of England, the Bank of Canada, the Bank of Japan, the Fed and the Bank of Switzerland implemented swaps so that these banks could obtain the currencies of the rest.

In 2013, the ECB signed a currency swap agreement with China. As of 2015, swaps have been used mainly to grant loans in dollars and Swiss francs to banks in the euro area.

And we arrive at 2019, at present. We are witnessing a new swap agreement between the ECB and the Bank of England, a currency exchange with character, at least for the time being, indefinite. The agreement is that the Bank of England offers financing in euros (contributed by the ECB) while the Bank of England receives in exchange for pounds. That is, the ECB and the Bank of England seal a foreign exchange swap agreement for the provision of euros to credit institutions in the United Kingdom. In this way, the Bank of England offers to lend euros weekly to credit institutions in the United Kingdom, and the ECB will receive sterling.

Thus, both the ECB and the Bank of England try that the uncertainty generated by the Brexit even more so after the resignation of Theresa May may affect the economy and the financial sector. And of course, now the possibility of a hard Brexit, a divorce without an agreement increase considerably (even Trump has gotten tricks in the matter by advising the United Kingdom to leave the EU and not pay any of the debt).

A question that is heard these days is: What could happen with the swap agreements reached between the European Central Bank and the United Kingdom, as well as between British financial entities and other European entities, if a hard ‘Brexit’ occurs? The answer in the following: precisely these agreements were activated to sustain the stability of the financial system and to guarantee the supply of euros and pounds sterling regardless of the resolution of the Brexit (agreement or no agreement).