The Bank of England has said that the failure of EU regulators to put in place measures to protect continental banks increased the risk of panicky trading on financial markets in the aftermath of a no-deal Brexit.
Without further guidance to EU banks and insurers and greater urgency to put in place rules before the 29 March article 50 deadline, traders on international money markets could raise the costs of lending to the banking sector. This could intensify the impact of Britain crashing out of the EU, the Bank said.
The central bank said measures implemented by UK banks over the past year had protected the City from a repeat of the 2008 collapse but EU institutions remained vulnerable to markets becoming more volatile, posing a risk of “spill back” effects to the UK.
The statement from the bank’s financial policy committee came as Threadneedle Street put in place a facility for UK banks to borrow unlimited amounts of euros, adding to mechanisms for unlimited lending in sterling and US dollars.
It said: “In the absence of other actions by EU authorities, some potential risks remain. Although these would primarily affect EU households and businesses, they could also expect to spill back to the UK in ways that cannot be fully anticipated or mitigated.”
Bank officials have become increasingly frustrated at what they see as foot dragging by parts of the EU, which means many UK finance companies will struggle to operate in the EUafter a no-deal Brexit.
Subsidiaries set up in Amsterdam, Paris and Frankfurt may not have the clearance needed from local regulators to operate, despite setting up offices and hiring staff. The Bank said they may still have customer data stored in London and be unable to access it.
This disruption will only add to the potential volatility in financial markets, the Bank said.
Officials have conducted stress tests on UK banks to determine whether they can survive a severe economic shock and credit crunch in the event of a no-deal Brexit.
The stress test scenario included UK GDP decreases of 4.7%, an unemployment rate of 9.5%, house price falls of 33%, and 40% falls for commercial property. It also includes a sudden loss of investor appetite for UK assets, a 30% decrease in the sterling exchange rate index and interest rates at 4% – a far more extreme set of circumstances than the City experienced in the 2008 financial crash.
Bank officials have worked to ensure the City remains resilient due to concerns that the government will fail to secure an agreement and transition deal before leaving the EU.
The agreements with EU regulators to provide temporary arrangements contrast with the failure of other industries to secure similar transition deals covering trade to prevent firms in their sectors from suffering losses or going bankrupt.
The shadow chancellor, John McDonnell, said he welcomed the bank’s moves to protect the financial services industry but that it was in stark contrast with efforts made to protect other industries.
He said: “Today’s report suggests that the financial policy committee are confident that the banking sector will survive intact if Britain crashes out of the EU. But what about the fate of other British industries? What about carmakers or the food sector? Why is there no solution for them?
“The Bank of England is working to mitigate the potentially disastrous effects of a no-deal Brexit for the financial sector but for the sake of the whole economy, Labour will do everything to prevent no deal from happening.”
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