Monday 22 October 2018 8:59 am

Financial stability should not be used as a bargaining tool for Brexit

Follow Catherine McGuinness
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Deal or no deal?

Last week’s European Union summit in Brussels had long been billed as a crunch moment for answering this key question and determining the future direction of the Brexit negotiations.

As the dust settles, however, it remains unclear whether the UK will be able to strike a deal with the EU27, meaning that businesses on both sides of the Channel continue to face acute uncertainty.

Read more: UK ready to agree Irish backstop deal to speed Brexit talks

The Prime Minister did indicate last week that the Brexit transition period could be extended by “a matter of months”.

We welcome the continuing commitment of both sides to deliver a legally-binding transition period as part of any withdrawal agreement.

It is not clear, though, whether any withdrawal agreement will be reached.

This means that it “is now pressing” – in the Bank of England’s words – for action to be taken that prevents disruption to cross-border financial services in the event of a no-deal Brexit.

I visited Frankfurt last week, and concern about cliff-edge issues was echoed in meetings with major German institutions.


The potential for significant market disruption was also recognised in recent public statements by the Association for Financial Markets in Europe and the International Swaps and Derivatives Association (Isda), which published a paper backed by six European financial trade associations.

There are serious cliff-edge issues that cannot be addressed by the private sector alone in the time remaining, including contract continuity, cross-border data flows, and the operation of clearing houses.

Both sides should urgently work together to address these issues in order to protect financial stability and ensure that the industry can continue to service its clients.

The Bank of England and Financial Conduct Authority took steps unilaterally last year so that European banks and insurers can continue operating in the UK even if there is no deal.

But we now need to see EU regulators, either collectively or bilaterally, take reciprocal action.

Failure by the EU authorities to act now could – as Isda points out in the derivatives space – lead to firms being forced to take disruptive, risky, costly, and potentially irreversible steps to seek to mitigate negative effects. And in some cases no such steps are practically available to them.

These cliff-edge risks could in turn destabilise markets as well as hitting households and businesses on both sides of the Channel.

It is positive that some EU voices, such as Felix Hufeld of the German regulator BaFin, are now calling for a bilateral political solution to this issue. He is right to do so.

This is not to prejudge the future relationship, but just to ensure that UK-EU business can go on without disruption on day one after Brexit.

I hope that the working group between the European Central Bank and the Bank of England can make some progress on these technical issues behind the curtain. But ultimately regulators can only act within the remit given to them by politicians.

Financial stability should not be used as a bargaining tool in the negotiations. It is fast approaching five months to go until Brexit. We need to be prepared for no deal.

Read more: Michel Barnier warns no-deal Brexit remains possible

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