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You can find the current article at its original source at https://www.theguardian.com/business/live/2017/dec/20/imf-latest-health-check-uk-economy-christine-lagarde-business-live
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Bank of England governor Carney faces MPs, IMF welcomes Brexit progress – business live | Bank of England governor Carney faces MPs, IMF welcomes Brexit progress – business live |
(35 minutes later) | |
Barclays and RBS failed 2017 test on the basis of the cut-off date for their capital reserves, but they’ve since built that up. Are you comfortable with that margin of error? | |
Woods says this is the first year we haven’t required any of the banks to do anything on the back of stress tests. On those two, if we ran the tests today they would both pass. Quite a significant moment. | |
Question on the 2017 stress tests, saying it was not designed to deal with a disorderly Brexit. How does the test scenario differ from a disorderly scenario. Are you confident all scenarios have been adequately tested. | |
Carney says the tests have a severe macroeconomic scenario, pound down by a quarter, house prices down by a third etc. On top there is a stressed hit for misconduct costs for the banks of £40bn. | |
We have £50bn of losses in the first two years, worse than financial crisis. Then looked at things that could go wrong in disorderly Brexit, derivatives, loss of trade, loss of confidence in UK assets etc. | |
We’ve looked at combination of all those, and the scale of losses would be significant but would be encompassed by stress test. | |
The banking system is adequately capitalised to take that hit. | |
But that’s it. If had disorderly Brexit and recession and misconduct at same time, likely system would need more capital. But we now have a banking system with 16% Tier 1 capital, and we have done it because there are these possibilities. | |
Lights out: | |
Nicky Morgan turns to the Budget, and the forecasts from the OBR, which she says are predicated on smooth and orderly Brexit. But EU chief negotiator Michel Barnier has said financial services not being part of a free trade agreement, so do you have a comment on the OBR forecasts and Brexit affecting economy. | |
Carney says the OBR reduced its productivity forecast, we had reduced, they are now below ours. | |
[As for] the smooth and orderly aspect, at the MPC we have a similar assumption. At FPC we look at risk so we look at a disorderly scenario - one of tests for stress tests is are they tough enough. | |
On Barnier, Carney says the EU council sets negotiationing mandate not European Commission. But UK financial system is effectively the banker for Europe, there are economies of scale that benefit both sides. We have improved regulations so we can operate the system reliably (lights dim in the room to laughter) and we have a commitment to openess in the system. From a trade perspective, you can have free trade in financial services as you have common, high standards. I don’t accept the argument that because it hasn’t been done in the past it can’t be done in the future. | |
Question: of the four that are systemic, how much capital would they need to commit to UK? | |
Carney says its relatively modest, bigger capital requirment would be because of the wholesale bank footprint. | |
It’s around £10s of billions. It would be material for some institutions and for the system. | |
Carney is asked if there is enough time if changes need to be made. | |
He says, we know these firms now, we know the risk so we’re in a pretty good position to have a limited amount of time to adjust their business model. | |
Deputy governor Sam Woods adds we would have needed a good reason to depart from established way of doing this. | Deputy governor Sam Woods adds we would have needed a good reason to depart from established way of doing this. |
We will keep position under review as negotiations progress. | We will keep position under review as negotiations progress. |
Nicky Morgan says this seems like a plan for the status quo. Alternative would have been for [EU banks] to create subsidiaries. | Nicky Morgan says this seems like a plan for the status quo. Alternative would have been for [EU banks] to create subsidiaries. |
Carney says if we didn’t have co-operation with EU, we will tell banks to create subsidiaries. Should we say you subsidiarise now and then un-subsidiarise in the future if there is an agreement, that would cause a tremendous amount of disruption. We can at the moment manage the risk. Now is not the time to say, we’re never going to get a deal. | Carney says if we didn’t have co-operation with EU, we will tell banks to create subsidiaries. Should we say you subsidiarise now and then un-subsidiarise in the future if there is an agreement, that would cause a tremendous amount of disruption. We can at the moment manage the risk. Now is not the time to say, we’re never going to get a deal. |
But it at the select committee in a year from now - which I’m already looking forward to - where it doesn’t look like we’d have {an agreement] then those directions to susidiarise would be there. | But it at the select committee in a year from now - which I’m already looking forward to - where it doesn’t look like we’d have {an agreement] then those directions to susidiarise would be there. |
It is clearer now which firms might have to subsidiarise which businesses. I don’t think this is a good outcome for system, for Uk, for EU. | It is clearer now which firms might have to subsidiarise which businesses. I don’t think this is a good outcome for system, for Uk, for EU. |
I’ve had discussions with all major EU counterparts and ECB to let them know this is our approach. | I’ve had discussions with all major EU counterparts and ECB to let them know this is our approach. |
Carney says this is a proposal and is out for consultation. | Carney says this is a proposal and is out for consultation. |
The Treasury Select committee is beginning, chaired by Nicky Morgan. | The Treasury Select committee is beginning, chaired by Nicky Morgan. |
Bank of England governor Mark Carney is going through the day’s earlier announcement. | Bank of England governor Mark Carney is going through the day’s earlier announcement. |
He says, foreign banks have £4tn of goods and assets, worth two times UK GDP. We have to authorise those banks, and we have announced an update on that. | He says, foreign banks have £4tn of goods and assets, worth two times UK GDP. We have to authorise those banks, and we have announced an update on that. |
We will need to authorise those banks that currently use the passporting. | We will need to authorise those banks that currently use the passporting. |
We look at two things. What does bank do and where is it from? | We look at two things. What does bank do and where is it from? |
Question is how system. Do they deal with households and small businesses, do they have retail. They will be systemic, and it will have consequences. Four out of the 77 from Europe fall into this category. The other aspect is in wholesale activity, question is how big is balance sheet, how interconnected is institution to UK financial system. | Question is how system. Do they deal with households and small businesses, do they have retail. They will be systemic, and it will have consequences. Four out of the 77 from Europe fall into this category. The other aspect is in wholesale activity, question is how big is balance sheet, how interconnected is institution to UK financial system. |
If they are systemic, what’s our relationship with home supervisor. At present we have strong arrangements, but in Europe those will change. | If they are systemic, what’s our relationship with home supervisor. At present we have strong arrangements, but in Europe those will change. |
We have to take a decision. Our presumption will be we will continue to have a form of supervisory co-operation and information sharing with EU authorities after Brexit. But we retain all our options, and if that is not forthcoming there will be consequences for those institutions. | We have to take a decision. Our presumption will be we will continue to have a form of supervisory co-operation and information sharing with EU authorities after Brexit. But we retain all our options, and if that is not forthcoming there will be consequences for those institutions. |
Our responsibilty is to protect system and UK citizens. Could be creating subsidiaries, restrictions on business, ask for further capital requirements. | Our responsibilty is to protect system and UK citizens. Could be creating subsidiaries, restrictions on business, ask for further capital requirements. |
Bank of England confirms it will impose no material additional regulatory or capital costs on most EU banks operating in the EU (they can continue to operate as "branches" of their home country bank, in the jargon) https://t.co/BVv4cpgY11 | Bank of England confirms it will impose no material additional regulatory or capital costs on most EU banks operating in the EU (they can continue to operate as "branches" of their home country bank, in the jargon) https://t.co/BVv4cpgY11 |