BOE seeks Brexit deal to save £20 trillion derivative pacts

Bloomberg

The Bank of England (BOE) said an agreement is needed as part of the Brexit process to protect the ‘long-term validity’ of 20 trillion pounds ($27.1 trillion) of existing derivative contracts.
The BOE’s Financial Policy Committee said on Monday that after the UK’s withdrawal from the European Union, it will be ‘complex and difficult’ for financial firms themselves to address the risks to continued servicing of contracts between counterparties in the
UK and the remaining 27 EU
countries.
“Impairment to the servicing of these contracts could disrupt market functioning and make it more expensive for firms and households to insure against risks,” the BOE said in a statement.
Tens of thousands of counterparties — about a quarter of both UK and EU client uncleared derivative contracts — could be affected, the BOE said in a statement. The continuity of insurance contracts and the free flow of personal data could also be affected, the central bank said.
The BOE also said the introduction of new international accounting standards known as IFRS 9 will “support financial stability,” and will not alter the necessary level of loss- absorbing capacity for the banking system.
The FPC will take steps to ensure that the interaction of IFRS 9, which will apply to most banks in the UK as of Jan. 1, with the 2017 stress test “does not result in a de facto increase in capital requirements.” “The FPC and Prudential Regulation Committee encourage firms to use any internationally agreed transitional arrangements as they adjust to the new regime, provided the arrangements are broadly similar to those currently being considered,” the BOE said.
The FPC confirmed its recommendation to the Prudential Regulation Authority to set the minimum leverage-ratio requirement for banks at 3.25 percent, with central bank reserves removed from the leverage exposure measure.

Consumer defaults could exceed banks’ estimates: BOE
Bloomberg

The Bank of England (BOE) said rapid gains in consumer credit could cause UK banks to suffer bigger losses than they’re expecting if the economy weakens.
“Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator or underlying credit quality,” the BOE’s Financial Policy Committee said on Monday. “As a result, they have been underestimating the losses they could incur in a downturn.”
In the event of a recession, losses from defaults in consumer loans would reach 30 billion pounds ($40 billion) within three years, the BOE’s stress tests showed. It will release complete results of that analysis on Nov. 28. The Prudential Regulation Authority will set capital requirements for individual banks to ensure potential losses can be absorbed that will total an additional 10 billion pounds, the FPC said. The statement comes in the wake of multiple warnings from central bank officials about consumer credit, which has surged about 10 percent in the past year.