No-Deal Brexit Could Cause Lending Crisis For EU Firms, Warns Bank Of England

In case of a no-deal Brexit, companies across Europe could be cut off from their lenders overnight, warned the Bank of England while sounding an alarm on the risks of a no deal to City banks.

The shock of Britain crashing out without a deal at the end of October would be able to be withstood by the City of London because it was well prepared, said Threadneedle Street. It added that banks would not fail as had happened during the last global financial crisis of 2008. But yet, major disruptions in their supply chain would have to be faced by companies.

There has been some progress made in the preparations of the UK and European banks to face the scenario of a no deal Brexit, said the UK central bank I while publishing its twice yearly financial stability report. It also added that similar preparations have also been made by international lenders based in London.

The Bank of England however warned that after Halloween, there can be a cut off in banking services and relations between about half of EU companies and their banks registered in Britain because of Brexit because such companies and those banking relationships were not prepared completely for a no-deal Brexit.

“In the absence of further action by EU authorities, some disruption to cross-border financial services is possible. Although such disruption would primarily affect EU households and businesses, it could amplify volatility and spill back to the UK in ways that cannot be fully anticipated or mitigated,” the Bank said.

Special rules legislated for by the British government, it would still be possible for those UK companies that have banking relations with EU banks located in Britain to continue to conduct business as usual as it does not even in the case of a no-deal Brexit. The Bank of England however has said that no similar measures have been so far taken by the European Union.

All of the biggest banks of the UK would be able to continue trading without the risk of collapse, unlike what had happened during the global financial crisis a decade ago, said the central bank, while making an assessment about the capacity of the City to stand up the potential shock of having to exit the EU without a transition period from the end of October.

And considering the increased trade tensions between the US and China, it would also be possible for the City of London to withstand a simultaneous international trade war, the Bank also said.

As a part of its annual health check of the banking system which has been planned to start 2021, fresh details of plans to stress test banks for climate-linked financial risks was also unveiled by Threadneedle Street.

(Adapted from TheGuardian.com)

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