U.K. Bank Regulator Pleads for Brexit Transition as Demands Soar

  • ‘Difficult prioritization’ beckons for U.K. bank watchdog
  • Risks to stability from fragmentation, complexity, costs

The workload caused by the U.K.’s withdrawal from the European Union is likely to place a “material extra burden” on the Bank of England and it may have to make tough decisions on priorities to accommodate it, Deputy Governor Sam Woods said.

Woods, who heads the BOE’s Prudential Regulation Authority, urged lawmakers to allow financial firms an implementation period to adjust after Brexit, in a letter to the U.K. Parliament’s Treasury Committee. Woods was replying to a request from committee chair Nicky Morgan for details of how banks and insurers are preparing for Brexit.

“The authorization, and then the ongoing supervision, of a significant number of additional firms is likely to place a material extra burden on the PRA’s resources,” Woods wrote. “It is incumbent on us to manage this burden but we may have to make some difficult prioritization decisions in order to accommodate it.”

The extra burden stems from the PRA inheriting the task of authorizing and supervising firms currently doing business in the U.K. under so-called passporting rules. Those rules put the responsibility for foreign branches primarily on home supervisors. That arrangement will expire when the U.K. exits the EU unless a separate deal has been reached.

Morgan’s letter to Woods was in response to his instruction to PRA-regulated firms in April to set out how they plan to deal with the U.K.’s withdrawal, with a special focus on the possibility that separation, trade and transition agreements are not in place.

Banks’ Plans

Woods said he had 401 responses to his April request for details of their plans -- 147 from banks and investment firms and 254 from insurers -- including all U.K. firms and material branches of European ones. The PRA is in the process of analyzing the submissions and is examining both the details of individual firms’ plans and looking at them collectively, he said.

The concern is that there may be risks to financial stability if everyone carries out their contingency plan at the same time. The PRA is also looking at whether there are “thematic issues or concerns that could give rise to risk,” Woods said. The BOE’s view of the submissions should be available in the autumn, he said. 

Potential risks to financial stability arise if there is disruption or fragmentation, pushing up costs or reducing the amount of hedging. Brexit might also damage the economy, forcing banks to “be able to withstand, and continue lending in, an environment of higher loan impairments, increased risk of default and lower asset prices and collateral values,” he said.

Firms will also have to restructure, which will in many cases create companies that are strongly interconnected between the U.K. and the EU and more complex than before, he said. “We will need to ensure that these structures do not impede supervisability or resolvability,” he said.

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