Carney: no-deal Brexit will hurt EU more

UK financial system more resilient to shock of a breakdown in talks, hints Bank of England Governor

THE European Union’s financial system will come off worse in a no-deal Brexit, Mark Carney told MPS yesterday, as another chaotic day in Parliament threatened to tip Britain closer to a scenario he said would also have “big economic consequences” at home.

The Governor of the Bank of England warned that the negative consequences on the Continent of a failure to agree terms would be “cold comfort” for Britain as the City would in effect be cut off from the EU.

Mr Carney gave evidence to the Treasury select committee, chaired by leading Remain rebel Nicky Morgan, and said the impact on the Continent of no deal would be “extreme fragmentation of the European capital market”.

“There will be a shortage of capital collateral capacity in the EU without question, which will take some time to adjust to,” Mr Carney said.

The Governor has described Britain as the EU’S banker, and his latest comments follow earlier warnings to Brussels that a drawbridge-style block to trade in financial services could have dramatic consequences. By contrast, he said the UK financial system is wellplaced to cope with the immediate aftermath of a no-deal Brexit thanks to efforts made by the Bank to test its readiness. But he said British bankers would be “left idle” by a sharp drop in demand for their services.

“This is fundamentally about taking responsibility to protect the financial system … It’s cold comfort, but it will be worse in Europe than it is here,” Mr Carney said.

The Governor appeared to endorse plans in Theresa May’s Chequers proposals to keep services out of any deal with the EU, saying the Square Mile needed “flexibility” to vary financial regulations.

“Cutting and pasting” rules from Brussels would not be suited to the scale and complexity of the City, he added. The Governor told MPS that the UK will need to be able to set “tougher standards” on regulation than those in the EU.

Andrew Bailey, head of the Financial Conduct Authority, also gave evidence. He said that the EU was wrong to play politics with the £29 trillion tied up in derivatives contracts, which the UK has offered to honour irrespective of a final deal.

The contracts are currently at risk in a no-deal scenario, something which EU politicians should not have allowed to become “a chip on the table” in negotiations, Mr Bailey said.

The Daily Telegraph understands that British regulators are increasingly frustrated that efforts to safeguard derivatives contracts via a working group co-chaired by Mr Carney and European Central Bank chief Mario Draghi have been derailed by politics.

A treaty to honour the contracts is essential, Mr Carney said, even in the event of no deal.

The financial system does not have capacity to handle the threat, he warned.

An agreement on derivatives would be a “glass half-full” no-deal scenario, the Governor said.

Mr Carney, who is due to leave the Bank in June, refused to commit to stay on in his role, even if the UK crashes out of the EU without a deal in March. Mr Carney said: “March comes before June.”