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BOE Warns U.K. May Face Economic Turmoil in No-Deal Brexit

BOE Warns U.K. May Face Economic Turmoil in No-Deal Brexit

(Bloomberg) --

The Bank of England warned of significant market volatility and “material risks” of economic disruption in the event of a no-deal Brexit at the end of this month.

The BOE’s Financial Policy Committee, in its last scheduled meeting before the current deadline of Oct. 31, said the financial system is prepared for the fallout of Britain abruptly leaving the European Union. Still, asset prices could fall sharply and financial conditions could deteriorate.

“Financial stability is not the same as market stability,” the committee said. “Significant further asset price volatility is to be expected in a disorderly Brexit.”

The BOE said the EU should do more to contain remaining risks to financial markets, including to 17 trillion pounds ($20 trillion) of non-cleared swaps maturing after October, and that these risks could “amplify volatility or spill back to the U.K.”

Prime Minister Boris Johnson has promised the U.K. will leave the EU with or without a deal by the end of the month -- triggering the biggest upheaval in the country’s trading arrangements in a generation. A British official said on Tuesday that a deal was effectively impossible because of disagreements between the EU and U.K. about the status of Northern Ireland.

While the BOE has said planning for a no-deal scenario has helped to limit the potential damage to the economy, the central bank’s worst-case scenario still sees a dramatic 5.5% drop in GDP.

BOE Governor Mark Carney says the goal is to prevent problems in the financial plumbing so that the sector doesn’t make things worse for the broader economy.

Other points in the FPC minutes include:

  • Digital currencies such as Facebook Inc.’s plans for Libra have the potential to become systemically important payment systems. They should therefore be tested for resilience and regulation before they’re launched
  • The U.K. banking system could absorb the simultaneous shocks of Brexit and an escalation of the trade war between the U.S. and China
  • Open-ended funds may need to change their redemption policies to avoid disruption. The FPC will review progress in the fourth quarter
  • The FPC reiterated that banks need to reduce their reliance on Libor. In the fourth quarter, the committee will consider whether more policy or supervisory tools need to be used to speed up the transition

©2019 Bloomberg L.P.