The International Monetary Fund (IMF) has said Brexit could undermine global financial stability, although admitted its predictions are highly uncertain.
Discussing one of the IMF’s flagship reports, Matthew Jones, assistant director of the IMF’s monetary and capital markets department, said: “Brexit obviously is going to present some challenges to financial stability.”
The report, released twice a year, said those challenges would come in ways that are difficult to estimate or predict before the negotiation is completed.
Read more: IMF upgrades UK growth forecast yet again
The IMF has previously taken a negative stance towards Brexit. It downgraded its forecasts for the UK's growth in the aftermath of the June vote, but later upgraded them repeatedly as the UK economy performed better than expected.
However, it still believes London’s status as a “key node” in the worldwide financial system could come under threat if financial firms are limited in cross-border operations, the report said.
Banking activities “likely to be most affected”, the report said, with uncertainty expected to rise temporarily.
Costs to the City could rise because of Brexit, the IMF said, particularly if firms are forced to operate under separate regulatory regimes.
The report said: “Financial firms will be forced to develop new strategies for operating and competing in a reconfigured world, and business structures are likely to become more intricate.”
The increasing complexity of financial firms will pose a challenge to the Bank of England, the Financial Conduct Authority (FCA) and other supervisory bodies in understanding new corporate structures.
British regulators will be forced to take over regulation of some of the bodies currently regulated by the European Securities and Markets Authority (ESMA), which would require a painstaking review of thousands of pages of rulebooks.
The cost of making international payments could also “increase notably”, the report said, while some banks may exit primary dealing of sovereign debt, reducing liquidity in government bond markets.
However, the report also noted the negative impacts will be highly dependent on the approaches taken by the UK government and the EU in upcoming Brexit negotiations.
Jones said: “The new relationship will be complex to negotiate in a short period of time, but with constructive engagement… negative externalities should be minimised.”
“These transition challenges will need to managed carefully.”