July 19, 2018, 6:05 am
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BoE says action needed to avert financial contract disruption after Brexit

LONDON- The risk of disrupted insurance and derivatives contracts for customers is “material” unless Britain and the European Union take joint action ahead of Brexit, the Bank of England said on Friday.

Britain has made progress towards mitigating risks of disruption to financial services after it leaves the bloc next March, the BoE’s Financial Policy Committee (FPC) said in a statement about its March 12 meeting.

“Nonetheless, material risks remain, particularly in areas where actions would be needed by both the UK and EU authorities,” the FPC said.

Britain and the EU aim to agree a Brexit transition deal next week to avoid a disorderly exit in 2019 but further steps were needed to ensure “continuity” of financial contracts.

Britain has signaled it will adopt legislation, but so far the EU has not reciprocated.

Financial industry officials say the EU may not act until the last minute in order to put maximum pressure on banks and insurers based in Britain to open new hubs in the bloc ahead of Brexit.

Without action, insurers in Britain and the EU may not be able to pay claims on policies or receive premiums.

There is particular concern over uncleared derivatives contracts worth a notional 26 trillion pounds, which need a temporary permissions regime to service them.

“EU authorities have not announced their intention to grant such permissions,” the FPC said.

Robert Ophele, chair of France’s markets watchdog, said on Thursday that public authorities should provide adequate legal support for continuity of contracts, possibly through provisions in Britain’s withdrawal agreement with the EU.

But ratification of that agreement is not expected until October or later, though a transition deal this month could allow regulators to begin talks.

Reuters has approached the European Commission for comment on the matter.

The FPC said Britain’s banking system could continue to support the economy if there was a disorderly departure from the EU, and that current Brexit risks don’t require banks to hold more capital.

It sent a warning to banks, however.

The committee will review in June whether the current 1 percent counter-cyclical capital buffer should be raised due to other risks, such as more home loans are being granted at high loan-to-income ratios that bump up against the BoE’s ceiling.

The FPC decided that this year’s stress test for the main banks and building societies should be the same as for 2017, which was more severe than the 2007-09 global financial crisis.

The test will take into account preparations for Brexit and the introduction of ring-fencing of retail banking arms with bespoke cushions of capital in January 2019.

This year’s test will also reflect a new accounting rule that forces banks to provision earlier for souring loans.

Rob Smith, a banking partner at KPMG consultants, said the decision to leave the test scenario unchanged was unexpected, and shows the BoE’s potential concerns about the accounting rule.

Systemic banks, such as HSBC and Barclays will face a higher test hurdle than last year, somewhere above 8 percent of risk-weighted asset, compared with just below that level in 2017. Missing the hurdle will mean aggressive, rapid action would be needed to bolster capital buffers.

“The higher pass mark was also unexpected. Domestic banks will now be assessed against systemic buffers which previously only applied to global players. This might create pressure for some of our UK focused banks,” Smith said. - Reuters
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