Britain’s chief financial watchdog has warned that contracts worth trillions of pounds between UK and European Union banks remain at risk of collapse following Brexit, after Brussels’ failure to implement protective legislation.
In a warning to EU officials that time is running out before next March to devise rules for EU banks, the Bank of England’s financial policy committee (FPC) said £29tn worth of contracts could be declared void.
Derivatives contracts, which provide banks and corporations with protection from interest rate rises, could come to an end without fresh legislation from the UK and EU, the committee said in its latest quarterly health check on Britain’s financial services industry.
The warning will be seen as a direct response to the European Banking Authority, which argued earlier this week that the UK was dragging its feet preparing for Brexit.
In an increasingly bitter war of words, EBA officials said there was little preparation by the UK authorities and individual banks for life outside the EU.
The FPC hit back, saying the Treasury was well advanced in its efforts to bridge the gap between banks in London and those on the continent, but Brussels had made little obvious effort to support its own financial institutions.
“The biggest remaining risks of disruption are where action is needed by both UK and EU authorities, such as ensuring the continuity of existing derivatives contracts. As yet the EU has not indicated a solution analogous to a temporary permissions regime,” it said.
The committee said a technical working group co-chaired by the Bank of England governor, Mark Carney, and the European Central Bank president, Mario Draghi, was a welcome development.
But it added that there was as yet no proposed remedy to reassure banks and their customers that contracts would be valid after next March.
Banks in the UK are well prepared for a serious economic downturn ahead of stress tests later this summer, the committee said, despite a strong rise in consumer debt.