In its twice-yearly Financial Stability Report (FPC), the BoE came out firing against the EU27 as the dispute over how the financial sector should best prepare for a ‘no-deal’ or hard Brexit.
The UK’s central bank says the European Commission is standing in the way of financial stability across Europe in a scenario where negotiations breaks down and the UK leaves the bloc without a transition period next March.
The report says the UK “has identified the most important risks from a cliff-edge Brexit to the provision of financial services”.
But in a clear shot aimed at Brussels, it said: “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 biggest area of concern for Bank of England Governor Mark Carney is the £29trillion stack of derivatives – contracts between two or more parties giving the agreed-upon value underlying a financial asset – that could become unserviceable when the UK formally leaves the EU next March.
With British banks sailing through another stress test to gauge their ability to survive another global financial chaos equal to the 2008-09 financial crisis, Mr Carney is more positive about the ability of British banks to deal with a hard Brexit next March if need be.
The FPC confirmed banks in Britain are holding enough capital and will not need any more to face any turbulence in markets if Britain leaves the EU next March without a deal.
The UK’s coffers are in good order with the amount of capital on their balance sheets – the best way banks can resist and respond to turbulence – has risen from 5 percent at the start of the financial crisis to 17 percent of the assets potential at risk.
However, on Monday the European Union’s banking watchdog, the European Banking Authority (EBA) said banks had failed to make enough progress in their Brexit preparations and should not expect help from “miracle” public intervention.
Alluding to President Donald Trump’s protectionist trade measures, today’s BoE report concludes that “events of the past few months are a reminder that many of the most important risks to financial stability in the United Kingdom originate beyond our shores.”
It said: “While UK authorities are putting in place measures to address financial stability risks that can be dealt with unilaterally, the complete set of mitigants to the risks of a cliff-edge Brexit also rely on the efforts of EU authorities.”
Fran Boait, executive director of Positive Money told Express.co.uk that risk to financial stability in the UK is very real with the potential for “global shocks” to damage stability.
He said: “As the Bank of England’s latest report shows, there are growing material risks to financial stability, particularly from external sources. It is therefore no surprise that in his Mansion House speech last week, the Chancellor announced that the Bank would be given the power to lend over half a trillion pounds in order to shore up the UK’s financial system.
“However such measures alone do not address the underlying weaknesses of the UK economy referenced in today’s Financial Stability Report, which makes Britain particularly vulnerable to global shocks, such as the G7’s largest current account deficit.
“Rather than responding to a future downturn by simply providing more liquidity for a broken financial system to abuse, the Bank needs to be given new tools to boost the real economy, such as the power to stimulate productive investment through overt monetary financing.”