BoE too confident about strength of major Tier 1 FX liquidity providers

BoE’s very generic statement does not take into account the potential curtailment of counterparty credit to OTC FX brokers. Tread with care!

Open a bank account directly with a central bank

Today, the Bank of England has stated that the UK’s lenders were strong enough to weather the rest of the coronavirus storm – even if unemployment soared to 15%.

On its own, that is a bold statement, and perhaps the layman can rest easy, however what about the FX brokerage sector?

The FPC today said that “a range of near-term risks” remain. They include market volatility resulting from draconian Covid related restrictions; the transition to life outside the EU; and geopolitical risks.

That is far too generic, and a much more detailed picture needs to be looked at.

If credit does not get extended by major banks – FinanceFeeds is aware that most mainstream Tier 1 banks are not allowing new business bank accounts to be opened – and fear of the default of existing lending sets in, where does this leave the counterparty credit agreements that are extended by the same banks to OTC derivatives companies?

The Bank of England said today that UK firms have raised over £75 billion in additional financing from banks and markets during Covid. It said this was “in large part through government-backed loan schemes”.

BoE figures show that borrowing in the summer was much lower than in the spring, although it ticked up in August. This extra lending puts banks in a very exposed position, as business is very much in recession globally, hence the risk of a percentage of companies that have borrowed that extra £75 billion go bankrupt, the banks will never see that lending repaid, and will have their own balance sheets weakened tremendously.

This will likely have a knock on effect to liquidity takers, as banks will not have the resources or risk appetite to extend counterparty credit, which is quite difficult to maintain as it is.

Some companies have reported that banks are making it more difficult to borrow through coronavirus loan schemes. MPs have said banks need to support struggling firms.

The FPC’s financial stability report said banks were strong enough to keep up Covid lending. “The UK banking system remains resilient to a very wide range of possible economic outcomes,” it said. “It has the capacity to continue to support households and businesses.”

The FPC warned that “cutting support to the economy to avoid the use of capital buffers would be costly for the wider economy and consequently for the banks themselves”. It said banks’ capital buffers “exist to be drawn down in stress”.

This is a relatively muted warning sign that banks are over exposing themselves, with existing customers, realizing that they are at a crossroads in terms of underwriting. Do they stop lending and allow existing clients to go bankrupt and not pay existing debts, or do they continue lending in the hope that some will survive and others will not?

This possible ideology is backed up by there being a curb on new business with most UK banks, whether you are looking for a bank account for a small business, or a dealing account with the Tier 1 FX desk.

Combined with the higher volatility, this dynamic makes a good case for further use of non-bank market makers which have become the darling of the OTC derivatives world in terms of highest level liquidity provision over recent years.

Given this, it is likely that the b-book trade warehousing model is very much alive and well, and for those wishing to operate on an agency basis, trades are more likely to be sent to non bank market makers rather than over-encumbered banks who are putting a brave face on a very dark storm.

  • Read this next

    Digital Assets

    Morgan Stanley to add spot bitcoin ETFs

    Morgan Stanley is reportedly considering adding spot bitcoin ETF products to its brokerage platform. This move comes after the Securities and Exchange Commission (SEC) approved the investment vehicle in January.

    Digital Assets

    Hong Kong ends license applications for crypto exchanges

    Hong Kong has officially ceased accepting license applications from cryptocurrency exchanges as of February 29, signaling a stringent regulatory shift.


    Volt secures EMI license, expands payment solutions in UK

    Volt has successfully obtained an Electronic Money Institution (EMI) license from the UK’s Financial Conduct Authority (FCA).

    Retail FX

    ASIC bankrupts finfluencer Tyson Scholz over stock tips

    The Australian Securities and Investments Commission (ASIC) has effectively bankrupted Tyson Robert Scholz, the figure behind “Black Wolf Pit.” The action marks a significant crackdown on so-called ‘finfluencers’ and individuals providing unlicensed financial services.

    Digital Assets

    Green Bitcoin Presale Raises $1M as Bitcoin Approaches its ATH

    The eco-friendly crypto project Green Bitcoin has seen its limited-time presale phase cross $1 million in funding. With an innovative gamified staking model and energy-efficient foundation, Green Bitcoin offers token holders a way to stake their tokens and generate yield.


    Introducing QuickNode Streams: Elevating Blockchain Data Management

    Discover QuickNode’s Latest Innovation: Streamlining Blockchain Data Streaming for Enhanced Efficiency and Accessibility. Explore the Future of Blockchain Technology with Streams.

    Industry News

    John Oliver rips into MetaTrader over role in ‘Pig Butchering’ scams

    “If your friend told you to download an app, and you saw it in the app store with good reviews, you might assume everything on it was legitimate. In before, you saw MetaTrader’s logo which looks like three men in suits jerking each other off under a table – an appropriate metaphor for cryptocurrency if I have ever seen one,” Oliver quipped.

    Digital Assets

    Coinbase supports Nethermind and Erigon to ease Geth dependency

    Coinbase plans to support additional execution clients as America’s largest crypto platform aims to improve the Ethereum blockchain’s resilience and mitigate the risks associated with the network’s heavy reliance on a single client.


    How AI Transforms Trading: Current Trends and Perspectives

    In 2023, we observed a boom of news about Artificial Intelligence (AI) in every field, whether finance, tech or medicine. In 2024 and later, AI will take an even more significant place.