Bank of England officials are concerned European banks are underestimating the risks from Brexit of a disruption which could threaten as much as 10 per cent of lending to British companies, according to minutes of their latest meeting on financial stability.
European banks are not “sufficiently focused” on the risks to their British operations, the minutes from the Bank’s financial policy committee (FPC) revealed today.
The FPC is concerned that some integral parts of the legal infrastructure supporting European financial services will cease to function after Brexit, depending on what future trading relationship is agreed between the UK and the EU.
That includes the risks to derivatives contracts worth a notional £20 trillion, laws around data sharing, as well as EU banks’ need to gain separate authorisation from UK authorities, and vice versa, if there is no deal allowing mutual market access for financial services by the time the UK leaves the EU.
The minutes said: “The risk of disruption to wholesale UK banking services appeared to be slightly higher than previously thought, given that a number of EEA [European Economic Area] firms branching into the UK were not sufficiently focused on addressing this issue.”
That disruption could affect EU branches accounting for a tenth of all lending to UK businesses, the FPC said.
The Bank’s Prudential Regulation Authority is “engaging firms to improve the state of their contingency planning”, the minutes added.
The minutes also revealed concerns about European Commission proposals to force central counterparties (CCPs) responsible for crucial clearing of financial transactions to be located inside the EU after Brexit. The Bank is concerned that some firms may not be able to relocate their activities because of a high degree of complexity or big costs, meaning their activity would be restricted after Brexit.
The Bank said: “In the event of access restrictions in those markets, EU firms would therefore have to move their activity to another CCP, which was likely to be difficult to achieve before the point of EU withdrawal. So there remained a substantial risk of disruption of cross Border clearing activity.”
The multiple issues the FPC identified “posed risks to the provision of financial services in both the European Union and the United Kingdom”, the minutes said.