Bank of England governor Mark Carney has warned that dozens of European banks face costly consequences if the UK and EU fail to achieve hoped-for cooperation over Brexit.
The Bank is proposing to allow firms to continue operating as normal in London, the world’s leading financial centre, after Britain leaves the EU – but said this could be jeopardised if talks turn sour.
Mr Carney signalled to MPs that it could revisit the proposals as soon as next spring – if there is a failure to agree a Brexit transition deal by the end of March.
That may mean banks having to set up stand-alone UK subsidiaries that it is estimated would need to be capitalised with tens of billions of euros.
Mr Carney stressed that there were benefits for both sides to the City’s status, with European banks bringing tens of thousands of jobs while the UK financial system also acted as “effectively the banker for Europe in the most complicated bits of finance”.
The Bank’s plans centre on 77 European bank branches currently in the UK with assets of £4tn, which currently operate through a “passporting” system that will end after Brexit.
Around half of those are seen as “systemic” – due to their size or close involvement in Britain’s financial system.
Image: The Bank of England announced plans on authorising EU banks’ UK branches after Brexit
The Bank said it was working on “the presumption that there will continue to be a high degree of supervisory cooperation between the UK and the EU”.
That meant firms could plan on the assumption that requirements for regulation and supervision could be met and they could apply for authorisation to continue to operate as branches.
But Mr Carney told the Commons Treasury select committee that the Bank was keeping its options open, and that in the absence of supervisory cooperation “there will be consequences for those institutions”.
Video: Brexit cooperation ‘absolutely possible’
If it is not working closely with authorities in countries where some London branches are operated from, the Bank would have to pile its own requirements onto those firms in a way that protects the safety of the UK financial system.
“We would cause certain actions to happen, most notably subsidiarisation, possibly restrictions on business, additional capital, liquidity, other factors,” Mr Carney said.
He added: “Now is not the time that one has to say ‘glass half empty, subsidiarise, we are never going to get a deal’.
“But if it comes to a point…where it doesn’t look like we’re going to have that, then those directions to subsidiarise and the consequences would be there.
Image: Mark Carney warned of ‘conseqences’ if talks do not go as planned
“I don’t think that’s a good outcome for the system, I don’t think it’s a good outcome for Europe, I don’t think it’s a good outcome for the UK.
“But if we don’t have that cooperation, then it will be the right outcome for the UK and we would cause that.”
He said the Bank would benefit from an implementation period being agreed by the end of March – and if this did not happen if might mean a “revisiting” of the Bank’s policy.
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Mr Carney also responded to remarks by the EU’s chief negotiator Michel Barnier that the UK could not have a special deal for the City of London.
The governor said: “I don’t accept the argument that just because it hasn’t been done in the past, it can’t be done in the future.”