Accusing European authorities of standing in the way of financial stability across Europe in the event of a hard exit from the EU next March, Mark Carney, BoE governor, made a point of noting what he saw as a more constructive approach from the UK government.
Having put in place a scheme to allow European financial services companies to continue to serve UK clients after a hard Brexit, Mr Carney said the UK now had a “rock solid solution” to potential disruption to derivative and insurance contracts, but said he was still waiting to see similar solutions on the EU27 side.
“The EU has not yet indicated their solution to these fundamental issues which would be expected to have more material impacts on the costs and availability of finance on the continent in the unlikely event of a disorderly Brexit,” the governor said.
The central bank’s one domestic concern about the financial stability consequences of a hard Brexit was the lack of continuity of derivative contracts, which it said needed action by governments on both sides of the English Channel. Only then would £29tn of derivatives, such as interest rate swaps, be guaranteed not to be disrupted after a hard Brexit.
The governor criticised the European Banking Authority for telling banks this week it was purely their responsibility to change the contracts before 29 March 2019 to make them Brexit-proof.
“This cannot be solved by the private sector,” Mr Carney said. “It will not be possible, ahead of March 2019, for private financial institutions on their own to mitigate fully the risks of disruption to financial services,” he added echoing the concerns of the UK financial sector.
BoE staff said that, for any bank, thousands of clients would need to agree to such contractual changes and past experience suggested any process of rewriting contracts and transferring them to the EU would take four years.
Miles Celic, chief executive of TheCityUK, representing the financial sector, said: “The time has come for European regulators to focus less on the negotiating ambitions of Brussels and more on the needs of customers.”
Other global risks are mounting
In the Financial Stability report, the BoE was most concerned about the rising dangers of global risks, ranging from protectionism to Italian and Chinese debt, as a source of instability in the months ahead.
Describing the risks as “material”, Mr Carney highlighted increased costs of borrowing for Italy following its change of government and tightening conditions in US dollar lending markets particularly in emerging economies, which have been hit by falling exchange rates and higher US interest rates. Loans to such markets, excluding China, account for 15 per cent of UK bank exposures. [...]
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