Governor says EU firms might also face lending crisis by being cut off from banks in London

The Bank of England has warned that a no-deal Brexit could trigger a material shock to the UK economy while causing widespread disruption for EU companies by cutting them off from London-based banks.

Stating that the risk of Britain crashing out without a deal had risen, the Bank said the City of London was ready to withstand such a scenario and avoid banks failing, as they did in the financial crisis. However, there would still be major disruption for companies.

Mark Carney, the Bank’s governor, said: “The perceived likelihood of no-deal Brexit has increased since last year. Although the degree of preparedness for such a scenario has improved, material risks still remain.”

He said the absence of further action by Brussels to get ready for Brexit could leave the door open to disruption for banks and their customers in the EU, while warning that the UK would face “material economic disruption” from a no-deal departure.

“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,” he said.

Against the backdrop of a rising threat of a no-deal Brexit, the central bank used its twice yearly financial stability report to say that UK, EU and international banks operating in London had made progress planning for a disorderly departure. However, it warned that about half of EU companies using banks registered in Britain could be cut off from their banking services after the Halloween Brexit date, as they had yet to fully prepare.

Britain has enabled UK companies banking with EU institutions located in Britain to keep on trading in the same way, even in a no-deal scenario, under special rules legislated for by the government. However, Brussels has not taken similar steps, the Bank warned.

Assessing the ability of the City to withstand the shock of leaving the EU without a transition period from the end of October, the central bank said all of the UK’s biggest banks could continue trading without risk of collapse, unlike in the financial crisis a decade ago. At the same time, banks could also withstand a rapid escalation of the trade dispute between the US and China, as well as large misconduct fines.

“That’s a triple whammy,” Carney said, adding: “No one wants a global trade war and the cost of that. Nobody wants a disorderly Brexit. Certainly nobody wants those to happen at the same time. But if it did, the system would be ready for that.”

Threadneedle Street also announced a crackdown on open-ended funds, a type of investment vehicle that can issue unlimited new shares to consumers, which it said could pose risks to financial stability. Carney last month warned that such funds were “built on a lie”. The type of fund was used by Neil Woodford, the embattled stockpicker who last month blocked consumers from pulling cash from his £3.7bn flagship investment vehicle.

Such funds can struggle to sell assets quickly enough to return money to investors if large numbers pull their cash at once. Though they offer daily withdrawals, the funds can invest in illiquid assets, such as shopping centres and other commercial property, that take longer than a day to sell.

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The Bank warned that it could consider banning consumers from making withdrawals at short notice for such funds.

Elsewhere in the report, the Bank revealed fresh details of its plans to stress-test banks for climate-linked financial risks as part of its annual health check of the banking system planned for 2021.

It said it would look at the risks facing UK banks from a world of rising temperatures with mounting natural disasters, as well as a separate scenario where governments introduce new rules to limit the burning of fossil fuels. It said it would publish further details later this year about the stress test.