BoE does not foresee Brexit related market disruptions threatening UK’s financial stability

On Friday, Britain’s central bank, the Bank of England, took steps to keep inter-bank lending rates steady through 2021 as Britain negotiates its trade relationship with the European Union.

In a statement, Bank of England Governor Andrew Bailey said, Britain had done all it can to mitigate risks from a cliff hanger Brexit, even as the country tries to ready itself against shocks and disruptions to its financial markets.

“What has the Bank of England got in its armoury, as it were? The answer is a lot. We will use our tools, as we did in March, should we be in that situation,” said Bailey during a news conference.

While the central bank does not foresee market disruptions threatening the UK’s financial stability, Bailey warned that EU customers may not able to gain access to UK financial services.

“There is a limit to what we can do,” said Bailey.

Market volatility could be reinforced by some derivative users not being fully ready to trade with EU counterparties or on EU or EU-recognised trading venues, said the central bank.

“Financial institutions should continue taking measures to minimise disruption,” said Bailey.

The central bank said the extra money banks must set aside during economic good times would be held at zero until at least the last quarter of 2021.

“Banks would not need to implement any future change until the end of 2022, and should use this flexibility to underpin lending to the rest of the economy, the Bank of England (BoE)” said the BoE while adding that it would allow banks to restart paying dividends and executive bonuses.

“Our message today is that the financial system has the resilience to go on doing that,” said Bailey.

British banks are likely to face challenges in 2021, including from higher business insolvencies and unemployment rates, said the BoE.

“The major UK banks can absorb credit losses in the order of 200 billion pounds, much more than would be implied if the economy followed a path consistent with the Monetary Policy Committee’s central forecast,” said the BoE.

Last month, it forecast that the economy would shrink by 11% this year because of the COVID-19 pandemic; it also forecast that the economy would grow by 7.25% in 2021, and take until the first quarter of 2022 to return to its pre-crisis size.

It also reiterated that it did not plan a post-Brexit relaxation of financial standards.

“Irrespective of the particular form of the UK’s future relationship with the EU … the Financial Policy Committee remains committed to the implementation of robust prudential standards in the UK,” said the BoE.

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