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LONDON (MNI) - The Bank of England's Financial Policy Committee
(FPC) said that UK banks would be able to continue to support the real
economy through a disorderly Brexit, but it warned that an abrupt shift
to World Trade Organisation (WTO) rules could disrupt the financial
services sector, hit productivity and disturb migration flows.
The minutes of the FPC's November 22 and 27 meeting fleshed out the
FPC's thinking on the threats posed by the UK leaving the European Union
and shifting to WTO rules if no deal were to be agreed with the EU.
In addition to resulting in tarrifs on UK goods and services a move
to WTO rules could result in a raft of regulatory authorisations to sell
goods and services.
"Abrupt falls in trade could drag on productivity, as currently
integrated supply chains were re-orientated, weighing on corporate
profits and real incomes," the FPC said.
It warned that disruption to financial services could affect the
functioning of financial markets, including for derivatives, for both
the UK and EU.
The FPC also noted the likelihood of disruptions to cross-border
trade and a fall in migration flows into the UK following a hard Brexit.
The BOE carried out stress tests on commercial banks which looked
at whether they had sufficient capital to withstand a deep recession,
with a 4.7% fall in GDP, a rise in Bank Rate to 4% and a steep rise in
The FPC said that "even particularly adverse combinations of the
risks that could be associated with Brexit would be encompassed by this
They agreed that as the stress tests showed UK banks capital was
adequate they would be able to continue to support the economy through a
disorderly Brexit. The problem could come if a disorderly Brexit came at
the same time as the world economy was hit by recession.
"The combination of a disorderly Brexit and a severe global
recession ... could result in more severe conditions than in the stress
test," the FPC said.
In these circumstances banks would be more likely to restrict
lending to the real economy.
The FPC looked at the case for increasing banks' countercyclical
capital buffer (CCyB) above the announced rise to 1%, but noted that
this would have been a surprise for markets and that the chance of a
global recession and disorderly Brexit occuring together was remote.
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