LONDON — The Bank of England laid out its hope Wednesday that European banks would continue to operate in Britain after Brexit in much the same way as they do now.
In a statement, the bank said European banks would hopefully not need to convert their branches in Britain into subsidiaries — a move which would create financial burdens and potentially prompt many banks, such as Deutsche Bank and BNP Paribas, to consider their futures in Britain.
The Bank of England said its plan is based on the assumption that a “high degree of supervisory cooperation with the EU” would continue after Britain leaves the bloc in March 2019.
However, it warned that in the event of a non-cooperative relationship between Britain and the EU post-Brexit, there could be “implications” for how it oversees firms.
If forced to create subsidiaries, EU-based financial firms would have to follow British regulations and would be compelled to hold large capital reserves locally in case of a market crash, for example. Those capital requirements do not apply to branches.
“Keeping the U.K.’s financial system open to foreign institutions is in the best interests of the U.K., EU and global economies,” the bank said.
Any exodus would hit U.K. government coffers hard, as financial services account for a large proportion — 11 percent — of total tax receipts, and potentially put thousands of jobs on the line. Britain’s financial sector accounts for 7 percent of the total economy.
“It is an act of economic common sense,” said Miles Celic, chief executive of TheCityUK lobby group. “Encouraging EU-headquartered financial institutions to stay in the U.K. post-Brexit will also ultimately support continued U.K. competitiveness, help preserve financial stability, and defend London and the U.K.’s position as an open global financial center.”
Celic urged the EU to offer similar reassurances to British-based institutions operating in the EU. Recently, the EU’s chief Brexit negotiator Michel Barnier said the City of London would not get a special deal.
This is just one of the uncertainties as Britain and the EU prepare to launch talks on their future relationship, now that the two sides have come to an agreement with regard to Britain’s divorce payment, the border between Ireland and Northern Ireland and citizens’ rights post-Brexit.
Businesses, particularly in finance, are urging a swift deal between Britain and the EU for the immediate period after Brexit.
This so-called transition period, which would involve Britain remaining part of the European single market and the customs union after Brexit even though the country would be outside the EU’s rule-making bodies, is set to be discussed in the coming months
Prime Minister Theresa May has indicated she’d like a transition period lasting around two years after Brexit. The EU’s chief negotiator Michel Barnier said Wednesday it should last only until the end of 2020, equivalent to around 21 months after the official Brexit date.
Uncertainty over what happens after Brexit is one of the main reasons why the British economy has come off the boil since the June 2016 referendum. Businesses face a raft of concerns, not least whether exports will be slapped with tariffs.
On Wednesday, partly because of such uncertainties, the IMF became the latest forecaster to downgrade its growth outlook for the British economy this year. It’s now expecting growth of just 1.6 percent.
That’s down from its previous forecast of 1.7 percent and means that the British economy will be one of the slowest-growing major industrial economies this year even at a time when the global recovery appears to be gaining traction. Growth is also set to drop to 1.5 percent next year amid the Brexit uncertainty and above-target inflation.
Before the Brexit vote in June 2016, Britain was among the fastest-growing Group of Seven industrial economies. But since then, growth eased, although recession warnings from the likes of the IMF did not materialize.
Growth has faltered partly because the fall in the pound since the vote has stoked inflation, and subsequently depressed consumption as earnings growth has lagged price rises.
IMF Managing Director Christine Lagarde urged a swift transition deal.
“This will provide households and firms with greater confidence going forward and towards the March 2019 exit date,” she said.