The Bank of England has sounded the alarm over the risks to City banks from no-deal Brexit, warning that companies across Europe could be cut off from their lenders overnight.
Threadneedle Street said the City of London was well prepared to withstand the shock of Britain crashing out without a deal at the end of October without banks failing as they did in the financial crisis. However, there would still be major disruption for companies.
Publishing its twice yearly financial stability report, the central bank said progress had been made to ready UK and European banks, as well as international lenders based in London, for a no-deal scenario.
However, it warned that about half of EU companies using banks registered in Britain could be cut off from their banking services after Halloween, as they had yet to fully prepare for Brexit.
“In the absence of further action by EU authorities, some disruption to cross-border financial services is possible. Although such disruption would primarily affect EU households and businesses, it could amplify volatility and spill back to the UK in ways that cannot be fully anticipated or mitigated,” the Bank said.
Britain has enabled UK companies banking with EU banks located in Britain to keep on trading in the same way, even in a no-deal Brexit, under special rules legislated for by the government. Brussels has however not taken similar steps, the Bank warned.
Assessing the ability of the City to withstand the shock of leaving the EU without a transition period from the end of October, the central bank said all of the UK’s biggest banks could continue trading without risk of collapse, unlike the financial crisis a decade ago.
The Bank also said they could withstand a simultaneous international trade war, amid heightened tensions between the US and China.
Threadneedle Street also revealed fresh details of its plans to stress test banks for climate-linked financial risks as part of its annual health check of the banking system planned for 2021.
It said it would look at the risks facing UK banks from a world of rising temperatures with mounting natural disasters, as well as a separate scenario where governments introduce new rules to limit the burning of fossil fuels. It said it would publish further details later this year about the stress test.
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