BoE's Financial Policy Committee warns about Brexit risks

Brexit poses "significant risks" to financial services companies, the Bank of England's financial stability committee warned in a report on Tuesday, which also admitted for the first time that the market's reliance on Libor had created a financial stability risk.

With European Union banks accounting for close to 10% of lending to British companies, the Bank's Financial Policy Committee said the "risk of disruption to wholesale UK banking services appeared to be slightly higher than previously thought, given that a number of EEA (European Economic Area) firms branching into the UK were not sufficiently focused on addressing this issue”.

There also remain "significant risks from disruption to cross-border clearing activity between the UK and EU", the FPC said, noting that central counterparties, such as LCH and ICE in the UK, provide important clearing and other services to EU clients across a range of markets.

European Central Bank proposals in June for changes to give the EU "a clear legal competence" in the area of central clearing, could be used to deny EU firms access to UK central counterparties unless they were located within the EU, the FPC said.

The FPC also warned that firms and households could find it more expensive to insure against risks if Brexit resulted in discontinuity of cross-border insurance and derivatives contracts, restrictions on sharing of personal data, and restrictions on cross-border banking, central clearing and asset management services.

It is likely to be difficult for firms to fully mitigate risks to the continued servicing of derivative contracts between counterparties on both sides of the Channel, the committee said.

After Brexit, if firms lose the permissions required to perform regular ‘life cycle’ events in these contracts, potentially affecting thousands of counterparties with a notional contract value of around £20trn, this could prove enough of a disruption to normal market functioning that would drive up insurance costs.

Mitigating against these risks would require some form of bilateral agreement, as well as the development and passing of new laws on both sides to protect existing contracts.