Trillions of reasons why EU needs a deal

Bank of England warns of risk to European lenders

EUROPEAN banks could be forced to sell trillions of pounds of assets at a knockdown price following a no-deal Brexit.

Bank of England officials warned that finance on the Continent faces serious disruption unless the European Union takes urgent action.

Bank bosses are concerned about so-called clearing houses in the City, which look after £70 trillion of complicated derivatives contracts used for everything from protecting businesses from interest rate changes to providing fixed-rate mortgages.

When Brexit happens in March 2019, banks from the Continent will be barred by EU law from using British clearing houses such as the one operated by the London Stock Exchange.

It means British clearing houses will have to tell European banks to take their business elsewhere. There is no replacement hub for derivatives clearing on mainland Europe, so major players such as Germany’s Deutsche Bank would likely be left with no option but a fire sale of their contracts to buyers still legally able to operate in London.

The most likely buyers would be Wall Street lenders such as JP Morgan, which are thought to have spotted a commercial opportunity in the chaos.

The ultimate result would be higher borrowing costs for consumers and businesses on the Continent, and a risk that lending in the eurozone could dry up.

In the UK, Parliament is passing a law which will protect British banks and those outside the UK from disruption.

The Bank of England’s Financial Policy Committee has warned the EU it needs to resolve the issue by changing its laws.

The problem will also be fixed if a Brexit deal is agreed. An FPC spokesman said: ‘There has been considerable progress in the UK to address these risks, but only limited progress in the EU.

‘The need for authorities to complete mitigating actions is now pressing.’

The FPC – whose members include Bank governor Mark Carney – said EU rules on clearing create legal uncertainty.

It added the only way to resolve this unless the EU takes action is by kicking European banks out of London clearing houses.

The committee said: ‘This will be costly to EU businesses and could strain capacity in the derivatives market. Timely action by EU authorities is needed to mitigate risks to financial stability.’

Major financial lobby groups backed up the Bank’s warnings.

Catherine McGuinness, policy chairman at the City of London Corporation, said: ‘Financial stability should not be jeopardised in a game of high stakes political poker. Both sides should urgently work together to address cliff edge issues.’