The European Union is at greater risk than the UK if the two parties are unable to agree a financial transition phase for the City of London after Brexit in 2019, the Governor of the Bank of England, Mark Carney, has warned.

Giving evidence to the Treasury Select Committee, Mr Carney stressed again that it would be "welcome" and "highly advisable" for UK-based financial firms that do business with Continental Europe to receive transition arrangements so they do not lose access abruptly in two years' time.

“If there is not such a transition put in place, in our view it will have consequences. We will work to mitigate those consequences as much as possible,” he added.

But he stressed that if this did not happen the greater financial stability risk lay with European states, rather than the UK.

“I'm not saying there are not financial stability risks to the UK - and there are economic risks to the UK - but there are greater financial stability risks on the continent in the short term for the transition than there are for the UK,” he said.

The Governor stressed the reliance of European households, governments, corporations and banks on the City.

“If you rely on a jurisdiction for half of your lending [and] half of your securities transactions you should think very carefully about transition from where you are today to where you will be tomorrow,” he said.

Bank of England on Brexit

The fear in the City is that the UK will leave the single market, potentially meaning UK-based financial firms will suddenly no longer be able to sell services to Continental customers.

The UK-based derivative clearing operations are also thought likely to be required to move to mainland Europe after Brexit.

The chief executive of the London Stock Exchange warned on Tuesday that the UK's vote to leave the EU poses a risk to the global financial system and could cost the City of London up to 230,000 jobs if the Government fails to provide a clear plan for post-Brexit operations.

Asked about the possibility of a regulatory "equivalence" regime for the City of London in the wake of Brexit, which could allow financial business to continue uninterrupted, Mr Carney stressed that "we don't want to be a rule taker as an authority" and for the Bank of England to be required to merely "cut and paste" financial rules made in Brussels and Frankfurt.

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Asked whether Brexit was still the biggest single risk to the financial system, the Governor said "strictly speaking the view of the [Financial Policy] Committee is 'no' ".

“The scale of immediate risks around Brexit have gone down” he said, while stressing that they were still "elevated".

The Governor was asked about the recent suggestion by his chief economist Andy Haldane that the Bank had had a "Michael Fish moment" when it failed to anticipate the 2008 financial crisis and also in its warning of a recession in the wake of the Brexit vote last year.

Mr Carney defended the Bank on the latter front and said that it had helped to "make the weather" through its provision of liquidity after the referendum vote and regulatory requirements in advance of it.