EU faces hit from failure to prepare for no-deal Brexit, Bank warns

Britain’s financial system is ready for potential no-deal Brexit chaos but households and businesses across the rest of the EU could be hit by Europe’s failure to take enough action, the Bank of England has warned.

In its latest Financial Policy Committee (FPC) report, the Bank said most risks to the UK financial system from a cliff-edge Brexit had been “mitigated”.

It cautioned EU authorities still needed to do more to help prevent disruption from a disorderly divorce, which could impact families and firms across Europe and potentially cause knock-on effects in Britain.

The warnings came as it announced a further move to ensure banks do not run short of cash in the case of a no-deal Brexit, allowing lenders to borrow from the Bank in euros from next week.

It said the decision was a “prudent and precautionary step” and follows last week’s announcement that it will allow banks to access extra funds, with weekly liquidity auctions from the start of March.

The FPC said while the financial system was prepared for possible Brexit turmoil, it still expects “significant market volatility” in the event of a disorderly exit.

It said: “The core of the UK financial system, including banks, dealers and insurance companies, is resilient to, and prepared for, the wide range of risks it could face, including a worst case disorderly Brexit.”

The Bank noted that “extensive action” had been taken by UK authorities to ensure UK households and businesses can still use existing and new services from EU financial institutions.

The same cannot be said of the EU, it added.

“Some disruption to cross-border services is possible and, in the absence of other actions by EU authorities, some potential risks to financial stability remain,” the Bank said.

“Although these would primarily affect EU households and businesses, they could also be expected to spill back to the UK in ways that cannot be fully anticipated or mitigated.”

Possible problems for EU borrowers could include higher interest rates on loans, while it said at least nine million EU insurance policyholders risk not being able to make claims or pay premiums after Brexit.

Customers in the EU are also not ready to do business with newly created units of banks and exchanges headquartered in Britain, which have been set up in European cities ahead of Brexit on March 29.

The Bank said: “The UK government has legislated to ensure that UK households and businesses can continue to be served by EU-based banks after Brexit.

“EU authorities have not taken similar action.”

It also repeated concerns that banks and businesses are at risk of being cut off from £20 trillion worth of derivatives contracts, which would impact a raft of financial products including fixed-rate mortgages.

The report also saw the Bank confirm the stress test in this year’s annual health check of the banking sector will be largely in line with that conducted in 2018, which was tougher than the financial crisis.

It will launch a pilot test in mid-2019 to test the resilience of lenders to withstand cyber attacks.