LONDON — Bank of England governor Mark Carney said on Friday that the global financial system is “at a fork in the road” and the next two years of Brexit negotiations “could prove highly influential in determining which path [it] takes.”
In a speech delivered in Canary Wharf, Carney warned that the global financial system is at a “fork in the road” as the UK and EU enter Brexit talks.
The “high road,” Carney said, would see the UK “build a more effective, resilient system on the new pillars of responsible financial globalisation.”
“The combination of robust international standards and trust built through transparent implementation and intensive supervisory cooperation can create a system of enhanced equivalence and mutual deference,” the governor said.
It would lead to “more jobs, higher sustainable growth, and better risk management across the G20.”
The “low road,” however, would see countries turn inwards and reduce cooperation with other financial regulators, which would “fragment pools of funding and liquidity, reduce competition and impede cross-border investment,” he said.
That scenario would lead to fewer jobs, lower growth, and higher domestic risks, Carney warned. “Trust and cooperation diminish, fragmentation hardens, capital flows are disrupted, and trade and innovation are curtailed,” he said.
“Long experience teaches that an open global economy is not predestined,” Carney said. “How the Brexit negotiations conclude will be a litmus test for responsible financial globalisation.”
Prime Minister Theresa May triggered Article 50 last week, kick-starting the two-year negotiation process before Britain formally leaves the EU.
The UK looks set to lose out on financial passporting as part of the exit process, which is the set of EU rules which allow businesses to sell services across the union from anywhere within it, and only require companies to be regulated in one country.
Carney stressed the importance of the City of London to European financial services, describing it as “Europe’s investment banker,” and suggesting that the UK and EU should prioritise close financial co-operation during Brexit negotiations.
He said the UK and EU should aim to create an “effective system of deference” to each other’s regulatory frameworks, and also called for a new “independent dispute resolution mechanism” which could resolve regulatory issues across the UK and EU after Brexit.
“Such an outcome would be entirely consistent with the UK Government’s stated aim of a new, comprehensive, bold and ambitious free trade relationship with the EU that embraces goods, services and network industries,” he said.
However, Carney said that while he hoped this outcome can be achieved, the Bank has a duty to prepare for all potential outcome and was doing so. He added that Sam Woods, the CEO of the Prudential Regulation Authority, has written to all UK financial firms with cross-border activities between the UK and EU to ask them what their contingency planning is.
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