Carney Returns Draghi’s Brexit Warning With One of His Ownby and
Says U.K. is ‘effectively the investment banker for Europe’
BOE report says financial stability risks are ‘elevated’
Mark Carney warned that the European Union has a lot to lose from any damage Brexit does to the British banking system.
“The U.K. is effectively the investment banker for Europe,” the Bank of England governor said at a press conference in London on Wednesday. “These activities are crucial for firms in the European Union economy, and it’s absolutely in the interest of the European Union that there is an orderly transition and that there’s continual access to those services.”
The remarks, made alongside a warning that risks to financial stability remain elevated, underline the stakes in the exit negotiations set to start next year. They were made after Dutch Finance Minister Jeroen Dijsselbloem said London risks losing its status as the euro area’s financial capital and European Central Bank President Mario Draghi said the U.K. would suffer the most in the divorce.
“We can’t allow the financial service center for Europe and the euro zone to be outside Europe and to go its own way in terms of rules and regulations,” Dijsselbloem said on Tuesday.
“If, in the long run, the risk of a less open U.K. economy in terms of trade, migration and foreign direct investment were to materialize, there would be a negative impact on innovation and competition and, thus, productivity and potential output,” Draghi said on Monday. “Such developments would first and foremost weigh on the U.K. economy. They would to a likely lesser extent also have some limited adverse spillover effects on the euro area.”
Prime Minister Theresa May plans to formally start the exit process by March, triggering at least two years of talks. Carney said in the press conference that all trade deals and financial reforms need a transition period, his first public endorsement of a buffer that businesses and banks are lobbying for amid concerns the U.K. will leave the EU before it strikes a deal over future links. May has acknowledged fears of a “cliff edge” without saying whether she will request a transition.
“If any such adjustments take place in a short timeframe, there could be greater risk of disruption to services provided to the European real economy, which could spill back to the U.K. economy through trade and financial linkages,” the BOE said in its Financial Stability Report, which it publishes twice a year.
The FSR was published alongside the latest financial health check. While in aggregate the tests showed the banking system is well capitalized, Royal Bank of Scotland Group Plc failed to clear some hurdles and had to submit a new capital plan. Barclays Plc and Standard Chartered Plc were also found to have “some capital inadequacies” and will have to build further buffers to keep themselves safe.
On overall stability, the FSR echoed risks from previous reviews, including the current account deficit -- almost 6 percent of GDP -- high household debt, commercial real estate, market liquidity and the global environment.
The BOE said there’s been no material change to the U.K.’s ability to finance the current account, but warned that a sharp adjustment in the trade deficit “could test financial stability.”
As this would be associated with a further drop in the pound, it would worsen the trade-off between growth and inflation, creating a further dilemma for Carney and fellow policy makers over how to set interest rates.
Sterling has weakened since the June EU vote, and the BOE noted the currency’s October flash crash. While this proved to be short lived, the bank said such events “underscore the concern that liquidity in some markets may have become more fragile.”
The BOE also drew attention to global risks, saying this source of vulnerability has increased since its last review in July. Expectations of a U.S. fiscal boost and risks of reduced global trade since Donald Trump’s victory in the presidential election reinforced weak spots in indebted emerging-market economies.
Uncertainty is further heightened because of the Italian referendum on Sunday and elections in countries including France and Germany next year, it added.
“The outlook for U.K. financial stability remains challenging,” the BOE said. “The economy has entered a period of adjustment following the EU referendum. The likelihood that some U.K.-specific risks to financial stability could materialize remains elevated.”