‘Unprecedented’ UK war chest to prevent Brexit FX crash - BAML
(17 May 2019 - United Kingdom) Bank of America (BAML) declared that the United Kingdom's (UK) government amassed a US$146 billion war chest to prevent a run on the Great British Pound in the event of a 'no-deal' Brexit in the lead up to 29 March 2019.
The capital buffer suggested the UK government was building up foreign exchange (FX) reserves on the chance the UK pulled away from the European Union (EU) without a deal, creating a run on pound sterling (GBP) and a current account crisis according to a FX reserve analysis by BAML.
Central banks generally accumulate FX reserves in various denominatations when they want to ensure they can continue to buy up their own currencies, placing a floor under the currency in the event of a mass selloff. The intent is to ensure that any “run” on the central bank can be staved off. The UK's central bankers are still haunted by the events of 1992 when currency speculator George Soros successfully “broke” the Bank of England by staging a run against the pound. Britain was forced to abandon the European Exchange Rate Mechanism.
BAML analysts Sebastien Cross and Kamal Sharma described the buildup as “unprecedented” among G7 economies. "In Q4 2018, UK FX reserves rose US$23 billion to US$146 billion (gross reserves). In nominal terms, this is a 19 percent quarter-on-quarter increase in reserves and the largest quarterly increase since our series began in 2000. The scale of this pace of reserve accumulation compared to other G10 economies is unprecedented.”
The UK did not make a disorderly exit from the EU on March 29 2019 as originally planned and the Bank of England (BoE) and UK government has since wound down their overweight FX reserve position. However the BAML analysts believe a similar strategy could be used in Q3 2019 when Britain again attempts to carry out Brexit finally. “Looking ahead, we could easily see a re-run of fourth quarter events as we head toward the next Article 50 deadline in October.”