Financial services face 'costly' disruption from Brexit - BoE
The Bank of England has called on the European Union to take urgent action or risk massive disruption to the European financial services sector post Brexit.
The Bank’s Financial Policy Committee said UK banks - which “lie at the core of the UK financial system” - would be able to withstand even a “disorderly, cliff-edge Brexit”.
But it warned that the EU needed to do more to protect the wider financial services sector from costly disruption after the UK quits the EU next March.
“There has been considerable progress in the UK to address these risks, but only limited progress in the EU,” said the FPC on Tuesday, following its monthly meeting on 3 October.
“In the limited time remaining, it is not possible for companies on their own to mitigate fully the risks of disruption to cross-border financial services. The need for authorities to complete mitigating actions is now pressing.”
Most at risk is the derivatives market. Derivative contracts are financial instruments drawn up between parties to hedge risk. They are handled by independent ‘middle men’, known as central counterparty clearing houses (CCPs).
The City is an important hub and is used by many EU financial institutions. But London and Brussels have failed to reach agreement over how the market will operate post Brexit.
The FPC said: “Timely action by EU authorities is needed to mitigate risks to financial stability, particularly those associated with derivative contracts and the transfer of personal data.
“EU rules create legal uncertainty about whether EU clearing members could continue to meet their ongoing obligations to UK CCPs and about the consequences for UK CCPs of continuing to provide services to the EU.
“To ensure the safe operation of CCPs and avoid financial stability risks, particularly in a stress, the contracts EU clearing members have with UK CCPs will need to be closed out, or transferred, before March 2019. This will be costly to EU businesses and could strain capacity in the derivatives market.”
The FPC said that EU members currently have £69trn of contracts with UK clearing houses.
Other areas of concern flagged included the rapid growth of riskier lending to businesses, which the FPC said was now larger than – and growing as quickly as – the US subprime mortgage market in 2006. Gross issuance of leveraged loans by UK non-financial companies reached a record £38bn in 2017 and a further £30bn has already been issued in 2018.
The Committee, which asses potential risks to the British financial system, will now review this “more extensively”.