Bank of England warns of post-Brexit financial services disruption

The Bank of England (BoE) said on Friday, December 11, that United Kingdom banks remained “resilient” to the risks of Brexit and the coronavirus, but warned financial services could face “disruption” when the transition period ends.

The central bank’s Financial Policy Committee (FPC), tasked with safeguarding the financial system, added that Britain’s major banks were capable of absorbing £200 billion ($266 billion, 220 billion euros) in credit losses.

“Financial sector preparations for the end of the transition period with the EU are now in their final stages,” the FPC said in its financial stability report.

“Most risks to UK financial stability that could arise from disruption to the provision of cross-border financial services at the end of the transition period have been mitigated” thanks to extensive preparations by the private sector and authorities, it said.

“However, financial stability is not the same as market stability or the avoidance of any disruption to users of financial services,” the report noted.

“Some market volatility and disruption to financial services, particularly to EU-based clients, could arise,” it warned.

The news came after British Prime Minister Boris Johnson warned Britain could crash out of the European Union without a trade deal after top-level talks floundered in Brussels.

Britain left the EU on January 31 this year but remains under its rules under December 31 while it tries to establish the terms of its new relationship.

Yet the BoE’s key committee expressed optimism on Friday in banks’ ability to withstand more turmoil.

“The FPC judges that the UK banking system remains resilient to a wide range of possible economic outcomes,” the FPC said.

“It has the capacity to continue to support businesses and households even if economic outcomes are considerably worse than currently expected” thanks to the buildup of substantial buffers of capital since the global financial crisis.

UK banks have already absorbed £20 billion in credit losses in 2020 as a result of chronic fallout from the deadly COVID-19 pandemic, it noted.

Britain has been one of the countries worst hit by the pandemic with the most deaths in Europe and an 11% contraction in the economy, the worst in 3 centuries.

The outlook for banks is set to worsen according to the report, as personal consumers and businesses are not able to repay their loans. 

“Nevertheless, the major UK banks can absorb credit losses in the order of £200 billion, much more than would be implied if the economy followed a path consistent with the [BoE’s] central forecast.

“The FPC judges that the UK and global macroeconomic scenarios required to generate losses on this scale would need to be very severe with, for example, UK unemployment rising to more than 15%.” – Rappler.com