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Bank of England governor warns banks to prepare for no-deal brexit

by Jonathan Adams
Bank of England

There are growing signs that UK-EU trade talks have reached an impasse

The Bank of England has warned Britain’s largest financial institutions to step up their preparations for a hard Brexit amid growing signs that trade talks with Brussels have reached an impasse.

Andrew Bailey, the Governor of the UK’s central bank, told the chief executives of Britain’s biggest banks on Wednesday that there needed to be an intensification of measures to deal with the possibility of a “no trade deal” Brexit.

His remarks, made during one of a series of regular private conference calls with senior banking executives, come amid increasing concern that talks between London and Brussels on a free trade agreement are deadlocked.

With the deadline to request any further extension from the European Union due to expire at the end of this month, time to agree the broad outlines of a deal within the next three weeks is beginning to run out.

The repeated insistence of Prime Minister Boris Johnson that he will not seek any extension to the transition period due to expire at the end of the year has sparked fresh concern that the UK economy is set to suffer further pain on top of the Covid-19 crisis.

Nissan, which is the UK’s largest carmaker, warned on Wednesday that its business in Britain “will not be sustainable” if the current tariff agreement with the EU is abandoned.

The Bank of England insisted that it was looking at “a number of outcomes” from the Brexit process as a result of its responsibility to ensure that the UK financial system was ready for “all risks that it might face”.

But Mr Bailey’s particular reference to a Brexit without a trade deal appears to have been interpreted as an indication that as far as the Bank of England is concerned the odds on such a scenario have narrowed. The call was attended by the chief executives of lenders including Barclays, HSBC, Lloyds and Royal Bank of Scotland.

In a statement, the BoE said: As we have said previously, the possibility that negotiations between the UK and EU over a future trading relationship might not conclude in a deal is one of a number of outcomes that banks need to prepare for over the coming months.

This week sees a final round of negotiations between UK and EU representatives before the deadline at the end of this month.

But despite some optimism that both sides are preparing to give some ground, a breakthrough has remained elusive. Fishing rights are believed to be a major sticking point.

Downing Street has said that Mr Johnson is due to hold talks with the European Commission president, Ursula von der Leyen, by the end of the month in what is likely to be the culmination of the prime minister’s latest round of brinkmanship with Brussels.

Mr Bailey has previously underlined to MPs that a Brexit which would see Britain and the EU revert on World Trade Organisation (WTO) terms would be likely to make business “more costly or difficult” compared to a free trade agreement.

Several banks and investment houses have warned that the pound will come under significant pressure if a deal cannot be struck. American giant JP Morgan told its clients this week that sterling would suffer a “fraught few months” in the event of no trade deal.

Britain’s banks are widely regarded to be in more robust financial shape than they were at the start of the 2008 financial crisis and extensive preparations for a hard Brexit were made ahead of the October deadline last year.

However, lenders are also having to deal with the ramifications of the coronavirus pandemic. The crisis is expected to cost the sector billions of pounds when the full scale of business failures and soured loans eventually emerges.

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