Yahoo Finance Bank of England warns lenders against knee-jerk Brexit reactions
Bank of England policymakers have flagged the country’s exit from the EU as a key risk to financial stability, warning British banks that any knee-jerk reactions to Brexit will hit the UK economy.
The BoE's Financial Policy Committee said that it would be making sure banks are prepared for a “range of possible outcomes” on Monday, two days before Prime Minister Theresa May begins the two-year process of leaving the EU.
In its quarterly assessment the FPC said that it will oversee banks’ contingency plans and "assess the financial stability implications of firms' plans to adapt" to Brexit.
It warned that any sudden changes could "disrupt the provision of market liquidity and investment banking services, particularly to the EU real economy, which could spill back to the UK economy through trade and financial linkages".
At a glance | What is Article 50?
Most banks have been drafting contingency plans for a number of months, with senior Goldman Sachs and Morgan Stanley executives saying last week that they were ready to fire the starting gun on those plans.
HSBC’s chairman said in January that Brexit could trigger a “jenga tower” of job moves out of the City, referring to the game in which players have to stop a tower of wooden blocks from falling.
The key concern for banks in London is that restrictions will be imposed on the type of services they can provide in the European Union. Goldman’s Europe head Richard Gnodde said the US bank had decided to execute its plans early because it could not predict whether a transitional trade deal would be agreed or not.
“If UK banks have not prepared for all eventualities, the risk to financial stability cannot be underestimated,” said Kirsty Barnes, a partner at Gowling WLG, in reaction to Monday's assessment.
Another area of concern flagged by the committee was lending standards, which it said could impact financial stability as consumer borrowing in the country soars and household debt rises relative to incomes. It said lenders practices' would be reviewed by UK regulators and should be "monitored closely’"
“This could principally represent a risk to lenders if accompanied by weaker underwriting standards,” the FPC warned. It also identified rising debt levels in China as a risk facing the UK financial system.
Also on Monday the BoE announced details of an extra ‘exploratory’ stress test for large banks, which will force them to submit projections for a seven-year period on top of its regular annual stress test scenarios.
The test, which will run every other year, will look at how banks can cope with a “structurally more challenging operating environment” such as high misconduct costs, low interest rates, competition from smaller banks, poor deal activity and weak global growth.
Meanwhile results for the annual stress test, used to ensure that the banking system has enough capital to absorb losses, will come out in the final quarter of this year.