The 4 biggest financial headaches caused by a ‘no-deal’ Brexit, according to the Bank of England

  • Bank of England publishes checklist of key financial stability risks of a “no deal” Brexit.
  • These include the “continuity of existed cross-border insurance and derivative contracts,” and “ensuring a UK legal and regulatory framework for financial services is in place.”
  • BoE Governor Mark Carney laid out the plans at a press conference following the release of the bank’s twice yearly Financial Stability Report.

LONDON – The Bank of England’s key Financial Policy Committee is creating a checklist of all the risks to UK financial stability should Britain fail to secure a Brexit deal.

“The FPC continues to assess the risks of disruption to UK financial services arising from Brexit so that preparations can be made and action taken to mitigate them,” the committee said in its bi-annual Financial Stability Report, published on Tuesday morning.

While the Bank of England is currently working on the assumption of what it calls a “smooth” Brexit – effectively where the UK leaves the EU with some form of deal, and most likely a transition arrangement – it has also taken steps to address what could happen in the event of a so-called “cliff edge” exit.

Risks from a cliff edge are significant, with the financial services sector – and particularly the derivatives and insurance markets – likely to be among the worst impacted. That’s because these areas of finance rely on a series of fiendishly complicated cross-border rules and regulations which allow the free movement of capital around the continent.

If Britain drops out of the EU without a deal, many of those rules could cease to be in effect, causing chaos in the derivatives markets. As such, the FPC, which is tasked with ensuring the stability of the UK financial sector, is taking steps to mitigate such risks.

“Consistent with the bank’s statutory responsibilities, the FPC is publishing a checklist of the steps that would promote financial stability in the United Kingdom in the event of a no deal outcome,” Bank of England Governor Mark Carney said at a press conference following the publication of the Financial Stability Report on Tuesday.

“This checklist has four important elements,” he said. These elements, in Carney’s words are:

  • “Ensuring that a UK legal and regulatory framework for financial services is in place at the point of leaving the EU. The government plans to achieve this through the EU withdrawal bill and related secondary legislation.
  • “Recognising that it will be difficult ahead of March 2019 for all financial institutions to have completed all the necessary steps to avoid disruption in some financial services. Timely agreement on implementation is necessary to reduce such risks, which could materially disrupt the provision of financial services in Europe and the UK.
  • “Preserving the continuity of existing cross-border insurance and derivative contracts is necessary.Domestic legislation will be required to achieve this in both cases, and for derivatives, corresponding EU legislation will also be necessary. Otherwise, six million UK insurance policy holders with £20 billion of insurance coverage, and 30 million EU policyholders with £40 billion of insurance coverage, could be left without effective cover. Around £26 trillion of derivative contracts could also be affected.
  • “Deciding on the authorisations of EEA banks that currently operate in the UK as branches. Conditions for authorisation, particularly for systemic firms will depend on the level of cooperation between regulatory authorities in the UK and EU. As previously indicated, the PRA plans to set out its approach next year.”

Carney spoke to the media and outlined the checklist soon after the bank revealed that Britain’s major banks all passed its annual stress tests for the the first time since their introduction in 2014.

“For the first time since the Bank of England launched its stress tests in 2014, no bank needs to strengthen its capital position as a result of the stress test,” the Bank of England said in a statement.