The Bank of England (BoE) on Friday ruled that British banks were resilient to the combined risks of Brexit and the Covid-19 pandemic, but that “disruptions” were possible in financial services after the transition period.
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The bank’s Financial Policy Committee (FCP) judges that the UK banking system is able to cope with “a wide range of possible economic scenarios” and that it has the “capacity to continue to (lend) to businesses and households even if the economy deteriorates considerably, ”argues the BoE in its report on the stability of the financial system.
The BoE attributes this solidity to “a substantial strengthening of the financial soundness ratio (“ common equity tier 1 ”) since the financial crisis” this year to 15.8% at the end of September, “three times higher than at the beginning of the crisis Of 2008.
The United Kingdom is one of the countries most affected by the Covid-19 pandemic with the highest number of deaths in Europe and a massive economic contraction expected to over 11% this year, the worst crisis besides 300 years.
While “difficulties for banks are anticipated over the next few quarters as unemployment and business failures increase from their current lows” in particular, “the major UK banks are able to absorb losses in about 200 billion pounds “(219 billion euros)”, continues the report.
The United Kingdom is facing a second shock with Brexit at the end of the transition period which ends on December 31. Negotiations are deadlocked and Prime Minister Boris Johnson said on Thursday there was a good chance the country would exit the single market without a deal.
While “most of the risks to UK financial stability” have been contained in view of the end of the post-Brexit transition period, it could be accompanied by “market volatility and disruption in financial services”, particularly for “EU-based” customers.
The European Commission has so far given only a few “equivalences” – namely the recognition that UK regulations in a particular area are equivalent or at least as good as that of the EU – to the UK financial system, particularly in the derivatives clearing.
If Brussels blocks or does not grant equivalences, part of the transactions on both sides of the Channel could be disrupted. In an attempt to avoid these difficulties, British banks have established entities in the EU or expanded their services in European financial centers outside London.
One of the fears of Brussels linked to Brexit is to see the United Kingdom, which wanted by leaving the EU to free itself from the European regulatory yoke, to deregulate its financial sector, but the British Monetary Institute ensures that it remains “committed to applying robust prudential standards ”.