Carney Warns of Brexit Danger to EU If Transition Isn’t Agreed

(Bloomberg) -- Mark Carney said the European Union faces a greater financial stability danger than Britain if the country leaves the bloc abruptly, his starkest warning yet of the need for both sides to agree on a transition deal for Brexit.

The Bank of England governor, speaking to lawmakers in London on Wednesday, reeled off statistics on the dependence of the EU’s businesses on the U.K. financial services industry, echoing testimony the previous day by the chairman of HSBC Holdings Plc that called for more time than the two-year leaving period allotted by treaty.

“It is absolutely in the interests of the United Kingdom, and the EU-27, that there is an implementation phase, a transition phase, and ideally that is agreed early on in this process,” Carney said. “If there is not such a transition put in place, in our view it will have consequences. We will work to mitigate those consequences as much as possible. And again, in my view -- I’m repeating myself -- those consequences would be greater for Europe than for the U.K.”

As the governor spoke, a letter by his European Central Bank counterpart, Mario Draghi, was released calling for oversight of U.K. clearing, a likely battleground in the negotiations Carney was referencing. That timing was reminiscent of December, when both spoke in the same week of the respective risks faced by both Britain the EU from leaving.

Think ‘Carefully’

“There is tremendous capacity, breadth, depth of financial services here in the U.K.,” Carney said. “If you rely on a jurisdiction for three quarters of your hedging activity, more than three quarters of your FX activity, half of your lending, half of your securities transactions, you should think very carefully about the transition from where you are today to where the new equilibrium will be.”

Draghi, in the letter to a member of the European Parliament dated Tuesday, revealed his own thinking on negotiations about clearing. “It will be important to find solutions that at least preserve, or ideally enhance, the current level of supervision and oversight,” he said.

The BOE governor was questioned on an analogy by the HSBC chairman, Douglas Flint, of a Jenga game of piled bricks that could fall apart in an adverse scenario of Brexit, and agreed.

“If we -- collective we in this case, on both sides of the Channel -- are caught in a position where the main counterparties for those activities can no longer transact those activities, can’t help companies dynamically hedge, that will draw liquidity from markets, it takes out capacity from markets, it can hold up transactions and it can cause unforeseeable moves in markets with collateral implications,” he said. “The Jenga example in this case is the transition point.”

Carney said that he had made his views known to counterparts but stopped short of divulging details. “We all take our responsibilities seriously,” he said.

“The governor has given strong advice today, both to the U.K. government and to the governments of the rest of the EU,” Andrew Tyrie, the Conservative lawmaker who led questioning of Carney, said in a statement. “I hope they are all listening.”

To contact the reporters on this story:
Craig Stirling in London at cstirling1@bloomberg.net
Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story:
Fergal O'Brien at fobrien@bloomberg.net
Brian Swint