LONDON (Reuters) - Banks in Britain must hold enough cash to withstand any disorderly Brexit hitting financial markets next March, Bank of England Deputy Governor Sam Woods said on Thursday.

FILE PHOTO: Flowers in bloom are sen opposite the Bank of England, in London, Britain August 1, 2018. REUTERS/Peter Nicholls/File Photo

Woods said he was making sure that Britain’s departure from the European Union is as smooth as possible for markets, even if there is no exit deal between London and Brussels.

“Just in case things go badly we have been working with firms to ensure they have in place liquidity sufficient to accommodate a severe dislocation in financial markets,” Woods told an audience of bankers.

“We all need to be ready for a range of outcomes.” he said at the annual City of London dinner in the capital’s financial district.

Britain is legislating to allow banks and insurers in the EU to continue serving UK customers after Brexit, even if Britain crashes out of the bloc with no transition deal.

“We encourage all firms to opt into the regime because it will provide certainty until March 2022, independent of the existence and duration of any wider implementation period,” Woods said.

“This is a straightforward, common sense way of lowering the risk of disruption to the City of London,” said Woods, head of the BoE’s Prudential Regulation Authority (PRA), which supervises banks.

The BoE published a welter of papers on Thursday to help the sector get ready for Brexit.

Woods urged the EU to mirror these efforts to ensure that financial contracts such as insurance policies and derivatives don’t face disruption, whatever happens next March.

Andrew Bailey, chief executive of the Financial Conduct Authority, told the same event that British regulators “urgently” need their EU counterparts to begin joint talks on cross-border memorandums of understanding.

“This technical, regulator-to-regulator coordination is essential to minimize disruption in a no-deal situation,” Bailey said.

The City is worried that the EU is dragging its feet, piling pressure on banks in Britain to shift staff and operations before March to countries that will remain in the EU.

Britain and the EU want a “standstill” transition period from March until the end of 2020 as part of a divorce settlement that has yet to be agreed.

CLOSELY ALIGNED

Bailey said there were good reasons for Britain to “seek to stay closely aligned to the EU” in financial regulation - comments that are likely to dismay pro-Brexit lawmakers who see exit from the bloc as an opportunity to ease up some rules to keep London competitive globally.

Bailey said Britain and the EU could commit to acknowledging formally that their respective financial rules were “equivalent” as early as possible to allow two-way business and remove potential “cliff edges” next March.

New rules that require Britain’s banks to “ring fence” their retail arms with capital cushions come into force next year.

The aim is to ensure deposits are kept safe whatever happens to the rest of the bank, and Woods said it was important that these new units remain independent. “We are setting up a border patrol of PRA staff who will police the fence,” he said.

Woods also warned he would be asking “more pointedly and regularly than before” whether pay and bonuses of senior bankers reflect their success or failure in tasks such as avoiding operational glitches.