ECB says euro-area financial system can withstand no-deal Brexit

[FRANKFURT] A chaotic UK exit from the European Union would have a manageable impact on continent's financial system if banks and other financial institutions are well prepared for the risk, the European Central Bank said.

Any disruptions in the euro area would be temporary and would most likely lead to higher costs rather than to any reduction in available services, the ECB said in its twice yearly Financial Stability Report published Thursday. The BOE published scenarios yesterday that showed dire consequences for the British economy, but it also said the financial system could cope in even the worst case outcome.

"The risk that the euro area real economy would be deprived of access to financial services following the UK's departure from the EU appears limited," the ECB's report said. "Financial institutions are strongly encouraged to step up contingency planning and act upon those plans in a timely manner."

About 43 trillion euros (S$67.08 trillion) of euro-area derivatives are set to be cleared in the UK after March 2019, and a transfer of all those contracts to European clearing houses would be complex and pose risks. But this has now been addressed by the European Commission, which has assured it will allow EU firms to continue use UK clearing in case of no deal.

"The risk of a sudden mass termination of contracts is, therefore, negligible," the ECB says.

There is some uncertainty about bail-in-able securities issued under British law if the UK decides not to recognize the European bank resolution authority the Single Resolution Board. The ECB says this issue could be solved unilaterally by the UK "by unilaterally recognizing the resolution actions of the SRB."

"UK insurance undertakings will lose their authorization to conduct business in the euro area (and vice versa) in a cliff-edge scenario. But UK insurance companies servicing euro-area policyholders have a number of options available to them to mitigate any disruption."

BLOOMBERG