Ensuring a smooth transition after Brexit is crucial for the economic stability of both the UK and the EU. This is particularly important when it comes to the financial services sector, especially after the recent warnings that millions could be put at risk financially is contracts are disrupted. Following these warnings, the Bank of England has expressed its concerns that the EU is still not doing enough to prevent these disruptions when the UK leaves the union next year.
The bank has warned that as a result of this inaction of the EUâ€™s part, â€śmaterial risks remainâ€ť to contracts worth trillions of pounds – despite warnings. According to the Bank of Englandâ€™s stability report, the fact the European regulators havenâ€™t granted temporary permission for firms to continue to service contracts post-Brexit is one of the biggest risks at the moment. It could leave up to 10 million insurance policies in the UK, and 38 million in the EU, left â€śunserviceableâ€ť.
In addition to this, an estimated ÂŁ29 trillion worth of derivative, which are essential for the functioning of the financial system and economy, could be put at risk. These are commonly used by companies to reduce the risks associated with changes in interest rates and the price of commodities. Customers in the UK and Europe are reliant on each other, and itâ€™s very important that these contracts can continue to work across borders.
The Bank of England explained: â€śThe biggest remaining risks of disruption are where action is needed by both UK and EU authorities, such as ensuring the continuity of existing derivatives contracts. As yet the EU has not indicated a solution analogous to a temporary permissions regime.â€ť They added that banks in the UK are prepared for the worst case scenario, which is the worst financial shock seen since the 2008 credit crunch. Banks have reported that theyâ€™ve boosted their capital reserves, which are set aside for possible financial crises.
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