Financial sector can withstand '˜No Deal' Brexit - Bank of England boss

Sam Woods, the bank’s Deputy Governor for Prudential Regulation, told The Yorkshire Post that he was confident that the UK’s financial services sector, which employs 23,000 people in Leeds alone, would be able to retain its strong standing post Brexit and that reforms carried out since the financial crisis meant that the wider economy would be less exposed to peril within the sector than it was with the economic crash of 2008.

Mr Woods said that the UK’s financial services sector was at a ”turning point” one decade on from the financial crash of 2008.

In a wide-ranging interview, Mr Woods – often tipped as a successor to current Governor Mark Carney – also said more work needed to be done nationally and internationally from cyber attacks and that Yorkshire’s economy, generally, was in good shape.

Concerning safeguards for the sector in the event of a no deal being reached, Mr Woods said that the UK’s central bank had focused on three distinct areas.

The first concerned a new three-year temporary permission regime to allow firms from the EU member states to continue to do business in the UK, something which affects many hundreds of European businesses and is currently journeying through Parliament.

The second concerned firms currently both here in the UK and third country firms who need to restructure outwards so that in the event of a hard exit a big chunk of their revenue doesn’t drop away.

The third area concerned ensuring banks are ready “in case there is a really severe dislocation”.

“We have had the banks all building up their liquidity to just make sure that they can withstand a severe dislocation in the markets if that occurs,” he said.

“None of that we are expecting, but our job is to kind of prepare for the worst. We have been spending a huge amount of time on Brexit and all of that effort, or almost all of it has been directed towards trying to avoid the risk of a cliff edge in financial services.

“We are mainly focused on getting across any cliff edge risk as it arises and our role is to make sure that manufacturers here in Yorkshire don’t have to worry about the financial services sector causing extra problems if things go badly. That is what we are trying to do.”

Perhaps the most complex of areas for the Bank’s preparations concerns the derivatives contracts written between UK and EU member states prior to the referendum results, a market of close to £100tn notional derivatives contracts.

When asked if there was as much of an imperative on member states to solve these “plumbing issues” as he called them, he said: “The problems that will arise if there is a cliff edge Brexit without a solution to that problem are in no sense going to be disproportionately felt by the UK.

“That is going to cause difficulties for many financial institutions within the EU27, so I think there is a very strong vested interest in fixing that.”

Ten years on from the financial crisis, Mr Woods said the UK’s banking sector was in far better shape.

He said: “I think we are really at a turning point for financial services here in the UK including for the part of it here in Yorkshire. Why do I say that? Because basically this is the year in which substantially we have finished the job with all of these post-crisis reforms. The best way to illustrate that is the ring fence we have put around the retail parts of banks.

“The next time banks blow up, we have the option to put the losses not on the taxpayer but on wholesale lenders or investors in banks. That policy is now fully in place and the banks have issued most of what they need to do to deal with it. We set out to rebuild the financial system after it imploded in 2008 and that was mainly about massively more capital, massively more liquidity and more sensible structures.”

He added: “The best way to think about that is that the banking sector had got to about 40 times leveraged before the crisis, that is an extraordinarily high amount of leverage. We have brought it back to about 20 times leveraged, that is still a lot of leverage, but it is still a more sensible place to be.

“So I don’t think we have forgotten those lessons but I do think we are at a very important point now which is as we come to the end of the reform job there is obviously a risk the pendulum starts to swing the other way and that people do forget the lessons of the crisis and I think a hugely important part of our job is to lean against that.”