BoE: Brexit Still Poses ‘Material Risks’ to Financial Stability

Photo by George Rex from Flickr

The Bank of England (BOE) has released a warning that Brexit still poses some “material risks” to the financial systems in both the United Kingdom and the European Union.

A statement that was released last Friday has summarised the conclusions from the most recent meeting of the bank regarding its Financial Policy Committee (FPC), a body that is designed to identify any possible disruption to the financial stability of the United Kingdom.

The FPC noted that some “material risks remain, particularly in areas where actions would be needed by both the U.K. and EU authorities.”

The Bank of England said that such areas included the processing of outstanding cross-border contracts. The central bank identified uncleared derivative contracts that were made between the United Kingdom and the European Union parties with a notional value amounting to £26 trillion ($36 trillion). An additional £70 trillion of cleared contracts is perceived as a particular risk to the European Union.

“Cleared” trades are trades that occur on an exchange while “uncleared” trades directly occur between two counterparties. A derivative is a security that has a price that is dependent upon or derived from, one or more underlying assets.

Another risk area that is emphasised by the bank committee is insurance. It said that major insurers might be unable to receive premiums or pay claims from policyholders that are in the opposing jurisdiction.

It is estimated that approximately 50 million people would likely be affected by liability values that are totaling £83 billion.

Despite noting that major banks in the United Kingdom are adequately capitalized to be able to cope with a disorderly Brexit, the FPC is set to carry out another round of stress tests this year.

The scenario includes a 33 percent drop in house prices and interest rates increasing to 4 percent. It is the same as that of last year.