The FSB Chair and BoE Governor Mark Carney discussed the Brexit preparations by BoE and the work of FSB in assessing the effectiveness of the post-crisis financial reforms, while speaking at the Economic Club of New York in New York City. He highlighted that "we must maintain the new institutional frameworks created" post the financial crisis. According to Mr. Carney, the most important activity in this area is the FSB focus on the timely, effective, and consistent implementation of these frameworks. FSB is also scanning the horizon to identify and address new vulnerabilities that emerge as the structure of the economies and financial systems change.
Mr. Carney emphasized that, when it comes to Brexit, BoE does not focus on the most likely outcome, but rather the possible consequences of a disorderly, cliff-edge exit from the EU, however unlikely that may be. Throughout the preparations for Brexit, BoE has been clear that it will maintain the traditions that have underpinned the UK position as a leading international financial center:
- First, FSB is ensuring that banks are ready for Brexit. In the FPC judgment, based on the stress tests of last year, the UK banking system has the capacity to absorb not only the consequences of a “no deal no transition” Brexit, but also the losses that could be associated with intensifying trade tensions, a further sharp tightening of financing conditions for emerging markets, and substantial additional misconduct costs.
- Second, liquidity is an important part of contingency planning for Brexit. UK-based banks (and CCPs) currently have around GBP 300 billion of borrowing capacity at BoE through collateral pre-positioned in the facilities. That broadly matches BoE's peak lending to the financial system during the crisis, and liquidity positions have improved significantly since then.
- Third, BoE takes a countercyclical approach. The UK deploys a countercyclical capital buffer (CCyB) through which capital is accrued in the good times for release in the bad. Two years ago, amid heightened uncertainty following the Referendum, the CCyB was reduced by GBP 6 billion, releasing GBP 150 billion of additional lending capacity. As the immediate uncertainty receded, we then required banks to rebuild it. Today their capital buffers are twice as high, meaning the FPC could unlock over GBP 300 billion of lending capacity, if required.
- Fourth, the FPC has identified the major cross-border risks to financial services that could arise in a cliff-edge Brexit. The biggest risks relate to contract continuity. Sixteen million insurance policyholders in the UK and 38 million in the European Economic Area have policies that firms might lose the permission to perform in a no deal scenario. Around GBP 100 trillion of cross-border derivative contracts could be disrupted by the loss of the regulatory permissions required to service them and loss of recognitions for CCPs. BoE has been working with the relevant parties over the past two years to ensure they have contingency plans for the worst-case scenario. In some cases, particularly in insurance, UK financial companies are restructuring so they can continue to serve their EU customers. If all current plans are delivered successfully, the number of EU policyholders at risk will fall to 9 million.
While talking about the global financial reforms, he added that the "reforms of the past decade have put in place a new financial system that could, with time, regain people’s confidence. However, the challenge for policymakers is that, when it comes to financial stability, success is an orphan. As memories fade, complacency sets in and pressure to compromise re-emerges." FSB is now assessing what is working as intended and addressing any inefficiencies or unintended consequences. The results of its first two evaluations—on the interaction of derivatives reforms and bank capital measures as well as the impact of G20 reforms on financing of infrastructure investment—will be reported to G20 Leaders in Buenos Aires next month. It is critical that the process of evaluation and adjustment does not compromise the overall system resilience. Addressing emerging vulnerabilities means having the foresight to anticipate new risks from cyber to central counterparties and from accountability to asset management. This "means having the discipline to build an anti-fragile system that is robust to the risks we do not anticipate."
Related Link: Speech
Keywords: International, Europe, UK, Banking, Insurance, Securities, PMI, Brexit, Regulatory Reform, Stress Testing, Contract Continuity, BoE, FSB
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