EU should act to prevent bank havoc: BOE

Bloomberg

The Bank of England (BOE) stepped up pressure on the European Union to remove threat that Brexit poses to trillions of pounds of derivative contracts.
Unless the EU follows the UK government in putting in place temporary workarounds, there could be havoc in financial markets when Britain leaves the bloc next March. Firms could find themselves unable to service trillions of pounds of contracts from derivatives to insurance policies.
In its Financial Stability Report, the BOE noted on Wednesday that the UK has announced some steps towards a solution, including a pledge to grant interim permissions if necessary, and highlighted that as yet, the EU hasn’t reciprocated.
“Progress has been made, but material risks remain” the BOE said. Of those, the biggest “are where action is needed by both UK and EU author-ities, such as ensuring the continuity of existing derivative contracts.”
BOE says “action is needed by both the UK and EU authorities” on ensuring continuity of existing derivative contracts. Outstanding cleared over-the-counter derivative contracts that could be affected by Brexit amount to around 67 trillion pounds. Around 27 billion pounds of insurance liabilities in the UK could also be affec-ted if insurers are unable to service contracts without local authorisation.
The BOE has been sounding the alarm for months about the issue of cross-border contracts. Firms will struggle to fix the problems on their own, so policy makers need to step in, the central bank says.
The BOE’s latest assessment of Brexit risks shows no improvement from March. About 29 trillion pounds of uncleared derivative contracts are at risk, along with 10 million UK insurance policyholders and another 38 million in the EU.
Apart from Brexit, the BOE judged UK domestic risks to be standard, and held the countercyclical capital buffer requirement for banks at 1 percent.
From next year, the BOE plans to stress test lenders for their resilience to cyber attacks. The Financial Policy Committee will set out its “impact tolerance,” the length of time it will accept a disruption to the economy from an attack. This might involve payments services or disruption to derivatives trading. The stress tests will be set to assume a “severe but plausible” scenario, and will be piloted next year.