LONDON — Brexit and the unfolding of events in Italy are two of the main risks to U.K. financial stability, the Bank of England said.
In its latest financial stability report published Wednesday, the BoE said that while U.K. banks are well-equipped to face any potential shock, unprecedented political events have the potential to cause significant disruption.
The BoEs financial policy committee (FPC) judged that the U.K. has made progress on Brexit preparations for financial services, but the EU hasnt. On derivatives contracts, for example, “effective mitigation of risk, other than through a bilateral agreement, would require legislation in both the U.K. and the EU to protect the servicing of contracts.”
And while the Treasury has “committed to legislate” to allow U.K. counter-parties to continue servicing EU clients, no such intentions have been shown on the other side of the Channel. Put in simple terms, if this doesnt change, the existing derivatives contracts between EU- and U.K.-regulated entities, like banks, worth £29 trillion, would be “unserviceable” on day one after March 29, 2019, according to the FPC.
Derivatives clearing has been at the center of a political tug-of-war between London and Brussels ever since the U.K.s EU referendum. However, the BoEs latest comments come just two days after the European Banking Authority published an opinion paper saying firms have to hurry up and implement their Brexit contingency plans, as there would be “no public-sector solution to private-sector problems like contract continuity.”
The FPC also said secondary legislation, granting firms temporary authorizations, and an implementation period after March 2019 would be necessary for financial institutions to “obtain necessary permissions and complete any restructuring.”
The BoE position is in stark contrast to those of the EBA and the European Central Bank and will feed into the ongoing row between the two sides over the shape of future trade and services arrangements.
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