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UK Banks Prepare Contingency For U.S. Debt Ceiling Failure

By Mani
Updated on

Some of the UK banks are readying contingency plans to cope in the event of the U.S. failing to lift its debt ceiling.

UK Banks Prepare Contingency For U.S. Debt Ceiling Failure

Margot Patrick of The Wall Street Journal reports that some of the UK banks’ senior executives are in touch with Bank of England’s Prudential Regulation Authority on how potential disruption in the U.S. bond market could affect their business.

UK banks avoiding treasury bills

Some of the UK banks’ top executives indicated they have been avoiding treasury bills nearing maturity, while stockpiling cash. Their fear stems from the news that the U.S. government contemplates a scenario of being unable to meet some of its obligations in the coming weeks.

However, some bank executives and market analysts expressed hope that they still anticipate the U.S. government would avert such a crisis.

Other bankers have also indicated a possibility of their tapping Federal Reserve’s lending window, in the event of a technical default.

Besides, Margot Patrick of The Wall Street Journal points out that the Bank of England, too, has a facility to offer banks with dollars, if the U.S. short-term funding markets seize up.

Meeting on debt ceiling worries

Amidst mounting worries that Washington’s political paralysis would force the country into default, U.S. Treasury Secretary Jacob Lew convened a high-level panel on financial stability on Tuesday.

In a statement, the Treasury indicated the heads of the CFTC and SEC discussed how the shutdown, forced by the U.S. lawmakers not agreeing to a budget for the current fiscal year, had affected their abilities to monitor and respond to market events.

The Treasury statement further highlighted that failure to raise the debt limit by October 17 would place the United States government in the untenable position of operating with only the cash on hand, which could severely impact financial markets and the broader economy.

U.S. bankers warn of prioritized payments

Meanwhile, chief executives of the U.S.’ largest financial institutions, in their recent meetings with Republican lawmakers and Obama administration officials, cautioned how putting some payments ahead of others would create insurmountable uncertainty for investors.

Deborah Solomon and Dan Strumpf of The Wall Street Journal report that the chief executives of the U.S. banks also pointed out such prioritized payments would drive up borrowing costs besides causing market disruptions.

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