The Bank of England (BoE) requires many banks to assess their resilience to shocks related to the USD, amid concerns that the Trump administration's policies may affect global financial stability.
Trump's new policies undermine confidence in the USD - the leading reserve and trading currency globally, prompting many trading partners in Europe and lawmakers to reassess their dependence on this currency.
MAIN CONTENT
The Bank of England is seriously requiring banks to assess risks from USD volatility due to Trump's policies.
The USD is being questioned about its position as European partners seek to reduce dependence.
The Fed is committed to continue supporting the market but risks cutting back on lending programs during a crisis.
Why does the Bank of England require risk assessments related to the USD?
The Bank of England, with the responsibility of maintaining economic stability, is requiring banks to perform stress tests to assess potential risks from USD volatility following the often-changing policies of the Trump administration. This is a move to prepare for possible incidents in the global financial market.
Moreover, a global bank based in the UK has been asked to simulate scenarios of stagnation in the USD swap market to assess specific impacts in operational practice. Solid financial system protection policies are being prioritized, especially when the USD remains the leading trading and reserve currency.
The UK government emphasizes: "The stability of national currency and economy largely depends on banks understanding and managing risks related to the USD amid international policy volatility."
Bank of England, June 2024
What is the risk of USD instability in the eyes of European partners?
Analyst assessments show that many European trading partners depend at least 20% on the USD in short-term financial activities, particularly through unsustainable borrowing markets during crises. This raises concerns about the stability and liquidity of the USD in the near future.
For example, European Central Banks have borrowed large amounts of USD from the Fed to offset liquidity shortages. This shows a high dependence on the USD not only in trade but also at the monetary policy level.
Richard Portes, Professor of Economics at London Business School: “In the event of a global USD supply crisis, the Federal Reserve may limit support due to political pressure from the Trump administration.”
Richard Portes, 2024, Source: European Systemic Risk Council Report
How does the Fed continue to maintain the role of the USD in the current context?
The Federal Reserve of the United States remains committed to maintaining the use of the USD in international banking and financial markets, while continuing loan programs to support partners such as the European Central Bank to ease USD supply tensions. This has been confirmed by several internal sources and leading financial institutions.
However, there remains a risk that the Fed may change this support policy, affecting the stability of the global market.
Partner USD Dependence Level USD Borrowing Form Main Risks European Central Bank ~20% Borrowing through Fed programs Liquidity shortages, short-term market risks Bank of England High USD swaps Swap market stagnation scenario Global Banks (HSBC, Barclays…) Average Lending and trade financing Dependent on policies and exchange rate fluctuations
What should banks and regulatory agencies do in the face of USD volatility?
Economist Richard Portes warns of the need to quickly reduce exposure to USD-related risks, especially short-term debt, to strengthen the financial system. The Prudential Regulation Authority of the Bank of England has also requested banks to provide detailed information to assess risk levels and response capabilities.
Strengthening stress tests, diversifying funding sources, and preparing response plans for shocks are essential for managers and financial institutions in the current context.
Frequently Asked Questions
1. Why is the Bank of England concerned about risks from the USD?
The BoE plays a role in stabilizing national finances; the USD is the largest trading and reserve currency globally. The risk of USD volatility directly impacts the UK market.
2. How do Trump's policies affect the USD?
Changing foreign and trade policies reduce international confidence in the USD, prompting European partners to reconsider their level of dependence.
3. Has the Fed stopped supporting USD loan programs?
Currently, the Fed continues to maintain its policies, but there is a possibility of changes, posing risks to banks and the global financial market.
4. What should banks do to reduce risks related to the USD?
Stress tests should be conducted, reducing USD dependence in financial operations, and diversifying funding sources.
5. What measures are being taken to counter USD instability?
Central banks and regulatory agencies are conducting assessments, implementing protective policies, and early warning systems for financial institutions.
Source: https://tintucbitcoin.com/anh-canh-bao-ngan-hang-ung-pho-usd/
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