BoE to check banks readiness for Brexit

LONDON: Britain-based banks should take steps to ensure they do not have to curb lending suddenly if the country leaves the European Union in a disorderly way, the Bank of England said on Monday as Prime Minister Theresa May prepares to start Brexit talks.

May has said she is prepared to walk away from the Brexit talks with no deal if only bad terms are offered, and the government has said it is making contingency plans for this "unlikely" scenario.

BoE Governor Mark Carney said in January that the Brexit process was a bigger financial stability risk to EU countries whose businesses relied on raising finance via London than it was to Britain itself.

Just two days before May formally notifies the EU that Britain wants to start two years of exit talks, the BoE asked banks to provide copies of contingency plans to reassure it that they are ready for "a range of possible outcomes".

"Risks to financial stability will be influenced by the orderliness of the adjustment to the new relationship between the United Kingdom and the European Union," the BoE´s Financial Policy Committee said in its quarterly policy statement.

Carney has said both Britain and the rest of the EU would benefit from a transitional period after Brexit when British-based banks could continue to serve clients elsewhere in Europe on broadly similar terms as at present.

But many banks operating out of London fear they will lose easy access to the EU´s single market. Some like Goldman Sachs have already said they will beef up their presence in continental Europe.

The central bank´s Financial Policy Committee is asking lenders to show how they can avoid their continental customers being abruptly cut off after Brexit, which could also damage the British economy.

"Sudden adjustment could disrupt the provision of market liquidity and investment banking services," the BoE said. Longer-term changes to bank business models after Brexit - as well as more complex legal structures - could reduce the resilience of the UK financial system.

Kirsty Barnes, a partner at law firm Gowling WLG, said Britain-based banks could face major restrictions if they did not achieve preferential access to the EU. "Banks will either have to shift certain operations or business units to the EU or we will see the closure of lines of business and products due to the increased costs or associated inefficiencies that may arise," she said.

The BoE said it was launching a review into consumer lending standards, which it now believes pose a greater risk than buy-to-let lending to landlords, which has cooled recently. While unsecured consumer lending is not a big part of British banks´ activity, it could bring heavy losses and the BoE said it was growing particularly rapidly.