British banks hold enough capital to cope with a no-deal Brexit and a global trade war simultaneously, the Bank of England said yesterday, although a disruptive Brexit would still cause major turbulence for financial markets and the economy.
Bank of England Governor Mark Carney also flagged ongoing concerns about illiquid investment funds, liquidity shocks, crypto-currencies and environmental dangers at a half-yearly update on the risks facing Britain’s banking system.
Carney said while banks were well prepared for Brexit, this did not mean the economy would be unscathed if Britain left the European Union on October 31 without a transition deal, something both contenders to be the next prime minister say is possible. “Financial stability is not the same as market stability,” Carney told a news conference. “In a disorderly Brexit, a range of UK asset prices would be expected to adjust sharply, tightening financial conditions for UK households and businesses.” The BoE noted a sharp fall in foreign investors buying British commercial property and some company loans. “There has been a deterioration in the quality of inflows... that are financing the current account deficit,” Carney said, adding that it was crucial Britain remained an attractive investment destination after Brexit.
The BoE said trade tensions between the United States and China had increased global financial risks and there was a rising number of heavily indebted companies in the United States, continental Europe and elsewhere.
British banks were better prepared for a downturn than they were before the 2008 financial crisis when they held much less capital and required multi-billion-pound bailouts. “The system would continue to serve UK households and businesses even if worst-case disorderly Brexit occurred at the same time as a global slowdown triggered by a trade war,” Carney said.
The BoE also said it would look at the risk posed by the use of so-called ‘tokens’ and other assets used to make payments outside the mainstream financial system.
Last month Facebook drew worldwide interest when it announced plans to establish its own payment system, backed up by a currency it calls Libra.
Carney said Facebook would need to get issues such as operational stability and anti-money laundering checks right first time, unlike the approach taken in other, less sensitive areas of technology. Banks’ ability to withstand liquidity shocks would also be put under the microscope later this year, the BoE said, though it added that it did not intend to tighten liquidity rules.
British-based banks already hold £1tn ($1.26tn) in liquid assets to cope with a disorderly Brexit or other shocks.
The Bank of England’s Financial Policy Committee (FPC), said it would team up with Britain’s Financial Conduct Authority to assess whether investment funds should be required to set lengthier withdrawal periods for investors if they hold hard-to-sell assets such as commercial property.
This follows the suspension in June of a fund from Neil Woodford, one of Britain’s best known money managers, which was unable to meet withdrawal demands from clients.
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