The financial disruption that could result if Britain crashes out of the European Union without a deal is to be examined by the Bank of England in a joint working group with the European Central Bank.
Intense lobbying by banks and insurance companies in the City, fearful that billions of pounds worth of cross-border financial contracts would lose their legal status should negotiations fail, appeared to have succeeded when EU officials agreed that the ECB would join Threadneedle Street officials to assess the risks.
The European commission – the EU’s executive arm – said the Bank of England and ECB, which regulates the 19-member euro bloc, would set up a joint technical working group to study risk management around the day Britain leaves the EU.
Officials said the work of the committee would be separate from Brexit negotiations in Brussels, adding that it would focus on the potential disruption of the financial services industry when Britain ceases to be an EU member at midnight at the end of Friday 29 March 2019.
The group will be chaired by the ECB president, Mario Draghi, and the Bank of England governor, Mark Carney, who will report regularly to the commission and Britain’s Treasury. They will both send representatives to monitor the committee’s work.
“Other relevant authorities will be invited on an issue-specific basis,” the commission said. “The primary responsibility to prepare for Brexit remains with market participants.”
UK negotiators are hopeful that a deal with the EU will allow businesses to continue relying on EU law until the end of 2020.
But the failure to reach agreement on the Irish border and deadlock over the future terms of trade have panicked City firms and heightened the risks of the UK’s departure without a deal.
The group is expected to hold its first meeting before the summer when it is likely to examine work already completed by the Bank of England and the City regulator, the Financial Conduct Authority, on the fate of cross-border insurance contracts and derivatives deals.
Before the Brexit vote in 2016, Carney put in place contingency plans drawn up with the Treasury that included the provision of a £250bn war chest to ensure financial institutions did not run short of cash during a period of uncertainty.
The Bank has set up arrangements with other central banks around the world to provide foreign currency to the UK markets should that be required. Following the Brexit vote, more than $2tn was wiped off global financial markets and Carney was forced to say he was ready to do whatever was needed to mitigate the impact of the vote.
However, it has become clear that the deep links between the City of London and the continent has meant the ECB needed to participate in devising plans to protect the financial system from disruption.
Carney has warned that it was in the interests of all parties in the negotiations to plan for a smooth Brexit because 90% of euro derivatives were cleared in London and thousands of insurance payouts made to EU citizens every day.
EU businesses, which raise 50% of their corporate funding in London, are also vulnerable to the UK crashing out of the EU without a deal.
Miles Celic, the chief executive of the financial services lobby group, TheCityUK, said: “Not all challenges thrown up by Brexit can be solved by the industry, the UK or the EU in isolation. There are many practical issues which require close regulatory dialogue and cooperation. The new working group is a positive and pragmatic development. We look forward to engaging with it and are confident that real progress can be made quickly.”
Chris Cummings, the chief executive of the Investment Association, whose members manage funds worth nearly £7tn, said he wanted to see officials devise a regulatory framework that would “provide firms with reassurance about their long-term ability to serve their customers, savers and investors throughout Europe beyond March 2019”.