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Bank of England urges post-Brexit transition deal to protect finance sector

Bank of England urges post-Brexit transition deal to protect finance sector
3 min read

The Bank of England has underlined the importance of a transition period to protect the UK’s financial sector after Brexit. 

Sam Woods, a deputy governor at the Bank, said the City had to prepare for a post-Brexit environment which would “test the resilience of the financial system”.

He warned that leaving the European Union had “the potential to affect the economy through supply, demand and exchange rate channels”, which could make loan defaults more likely and collateral assets worth less.

Mr Woods, who heads up the Prudential Regulation Authority, also said there was a “material risk” to the regulation of financial services as a result of increasing complexity arising from fragmentation of the industry and firms setting up alternative bases in other member states.

His comments came in a letter to Treasury Committee chair Nicky Morgan, who had asked him to provide details of the Bank’s correspondences with finance and insurance companies.

He said he would give Ms Morgan further information later in the year, but laid out some of the risks already identified from the firms’ responses.

As well as the possibility of a “broader disruption” to the economy which could make lending conditions less favourable, companies had identified a string of sector-specific problems.

Mr Woods said concerns about existing contracts and data transfers were “significant issues for many firms”, and that the prospect of companies setting up satellite offices in the EU would “increase complexity”.

“In particular in relation to 'outbound' firms (those firms based in the UK but selling services to clients in the EU) for both banks and insurers, re-structurings will in many cases result in strongly inter-connected entities between the UK and the EU. We will need to ensure that these structures do not impede supervisability or resolvability.”

The PRA, which is responsible for ensuring the soundness of finance companies’ balance sheets, also raised the alarm about a “material extra burden” on its resources.

“The issues set out above pose a material risk to our objectives, and this work is therefore a top priority. It is incumbent on us to manage this burden but we may have to make some difficult prioritisation decisions in order to accommodate it,” Mr Woods added.

“With these risks in mind, as I and colleagues have noted consistently when giving evidence to the Treasury Committee previously, some form of implementation period is desirable, in order to give UK and EU firms more time to make the necessary changes to adjust to the UK's new relationship with the EU in an orderly way.”

In response to the letter, Ms Morgan said: “The UK leaving the European Union is a complex task. The potential extra burden on the PRA’s resources, and the risk that may pose to its objectives, is an issue that I’m sure the Committee will want to monitor.”

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