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Risk Warnings Against Financial Stability Due To Hard Brexit Issued By Bank Of England To EU

Risk Warnings Against Financial Stability Due To Hard Brexit Issued By Bank Of England To EU
There is a growing risk for almost £70tn of complex financial contracts because of lack of adequate planning for Brexit by the EU according to the bank of England. This is by far the strongest such warning that the British central bank has issued on Brexit.
Even as time is running out, only partial progress has been made by the EU to protect the financial system said the bank. There is just over six months remaining before the United Kingdom formally leaves that economic bloc in March of 2019.
“In the limited time remaining, it is not possible for companies on their own to mitigate fully the risks of disruption to cross-border financial services”, the bank said in a statement by its financial policy committee while focusing on the urgent nature of the situation. 
The bank warned that if there is no immediate action, the moment the UK leaves the EU, the contracts governing the financial derivatives would be rendered illegal. These financial contracts are presently sold to companies across the UK-EU border by banks so that the companies are able to shield themselves from unfavorable movements in interest rates and other changes in global markets.
This movement is handled through a process called “clearing” and about £69tn of outstanding derivatives contracts still remains with EU companies in the UK. The bank also noted that after Britain’s exit from the EU in March 2019, about £41tn will mature.
Ever since the latest global financial crisis, the process of clearance has assumed greater significance. This was implemented by the EU as a means to force banks to trade greater volumes through clearing houses. The aim was to enhance transparency and to sidestep the confusion when banks go bust with the presence of a complex web of contracts with multiple parties.
EU banks’ trades are handled by EU-authorised clearing houses. Butin the case of a no deal Brexit, UK organisations handle the bulk of business such as the London Stock Exchange’s LCH, could be placed outside of the rules. The UK clears more than 90% of interest rate swaps of the companies in the EU and this is amongst the most common types of financial derivative.
Measures for granting temporary permission to give EU banks access to the British market have already been taken by the UK even though it has to be ratified by the UK parliament and there is little time for arriving at a permanent solution before setting in of Brexit. Despite the UK central bank issuing warnings to the EU on previous occasions, there is greater urgency in the current situation.
The Bank of England also issued a warning about the potential risks to the UK financial systems aside of Brexit. Those include significant growth of leveraged lending to high-risk companies which has been equated with the situation in the sub-prime market in the United States just before the global financial crisis.

Christopher J. Mitchell

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