BofE calls for financial firms to prepare for Brexit; introduces additional bank stress test

The Bank of England’s Financial Policy Committee has called for firms to prepare for Brexit to avoid disrupting market liquidity and investment banking services.

At its meeting on 22 March, the FPC said it is also considering how to counter businesses creating increasingly complex structures post Brexit, which could “reduce the resilience of the UK financial system”.

With Article 50 being triggered on Wednesday, the FPC says there are “a range of possible outcomes”, with risks to financial stability “influenced by the orderliness of the adjustment to the new relationship between the United Kingdom and the European Union”.

“The FPC will assess the financial stability implications of firms’ plans to adapt to the United Kingdom’s withdrawal from the European Union,” the FPC says. “The FPC supports the work of the Prudential Regulation Authority and FCA to ensure regulated firms have comprehensive plans in place to operate in a range of possible outcomes. Sudden adjustment could disrupt the provision of market liquidity and investment banking services, particularly to the EU real economy, which could spill back to the UK economy through trade and financial linkages.”

The Bank of England has also announced an additional stress test for UK banks with a seven year timeframe to run alongside the annual cyclical stress test.

The exploratory stress test will assess how resilient the UK banking system will be if “recent headwinds to bank profitability persist and intensify”, and will consider weak global growth, persistently low interest rates, falling world trade.

Cross-border banking activity and the increased pressure on large UK banks from smaller banks and non-banks will also be taken into account in the stress test. It will have a seven-year horizon to capture these long-term trends and will act as a complement to the annual cyclical stress test.