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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/BVv4cpgY11Bank 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
Just ahead of Bank of England governor Mark Carney’s appearance before the Treasury Select Committee, the Bank said it planned to spare European banks from costly extra capital requirements after Brexit. But it warned that could change if the current talks are unsuccessful. Reuters reports:
Setting out its position for a possible tussle with Brussels over London’s position as a top global financial hub, the BoE said it wanted to ensure it could effectively oversee foreign banks and financial services firms after Brexit.
“The foundation of the Bank of England’s approach is the presumption that there will continue to be a high degree of supervisory cooperation between the UK and the EU,” the BoE said in a statement.
That assumption might be “revisited as Brexit negotiations proceed,” BoE Deputy Governor Sam Woods said in a letter to the bosses of banks and insurers...
The BoE said the bigger and more complex the branches of European banks in the UK, the more supervisory cooperation there would have to be to avoid them being classed as subsidiaries, requiring them to park costly extra capital in Britain.
There 77 branches of banks from the European Economic Area, in Britain. There are also 80 branches of insurers from the EEA.
The BoE plans to start the process of reauthorising the branches of up to 200 EEA financial firms in Britain in early 2018. It hopes Britain will secure a Brexit transition deal to start after Brexit in March 2019 to give regulators more time.
Back with Michel Barnier, the EU’s chief Brexit negotiator, saying the European commission wants the transition period to end on 31 December 2020, and Dr Adam Marshall, Director General of the British Chambers of Commerce, does not appear entirely happy:
Businesses will welcome the fact that the European Commission has now joined the UK government in backing a single adjustment for business, at the end of an agreed transition period.
However, the end date proposed by the Commission seems better-suited to the EU’s bureaucratic framework than to real-world business conditions. The two sides’ main criterion should be to set a timeframe that allows businesses on both sides of the English Channel to adequately prepare for a new trading relationship between both parties.
Over in Athens, parliament has ratified the 2018 budget. It is the last one before debt-burdened Greece exits international supervision under its latest bailout programme. Helena Smith reports:
Passage of the budget marks the beginning of the end of a new era, according to Greece’s leftist-led government. Addressing MPs last night, prime minister Alexis Tsipras described the budget - which includes almost €2bn in new austerity measures - as the last one that would have to be applied under an economic adjustment programme.
Already, Greece was on the road to economic recovery, he said, with the country heading towards a “clean exit” when its third rescue programme officially expires next August.
He told parliament:
This year is the first with real growth after many years of recession. We took over a country with empty coffers, with unemployment close to 27%, with zero trust among its partners and international markets, and with the 10-year bond yield at almost 8%.
The claims were quickly debunked in an often rambunctious debate with the centre-right. The main opposition leader, Kyriakos Mitsotakis, described the government’s narrative of a “clean exit” as Tsipras’ “new big lie.”
Instead of spurring growth, the new fiscal measures would dampen it, he said, insisting that Greece’s promise to achieve high and “exhausting surpluses” in the years to come would mean yet more international supervision. The debate comes against a backdrop of disquiet among lenders over welfare handouts pledged by Tsipras, including a one-off €400 payment to the unemployed, announced in recent days.
The International Monetary Fund says its gloomy forecasts in the runup to the referendum are now playing out in the numbers.
Even so, the IMF’s forecasts for UK growth for this year and next compare favourably with those from both the Organisation for Economic Co-operation and Development (OECD), and the Office for Budget Responsibility (OBR), the government’s independent forecaster.
IMF
2017: 1.6%
2018: 1.5%
OECD
2017: 1.5%
2018: 1.2%
OBR
2017: 1.5%
2018: 1.4%
Here is our full story on the IMF’s annual health check of the UK economy.
The IMF’s managing director, Christine Lagarde, gave a strong defence of the Fund’s gloomy forecasts for the UK after Brexit, saying pre-referendum warnings of slower growth were coming true.
Retail sales rose in the runup to Christmas according to the latest survey from the CBI, but at a slower pace than retailers had expected.
Supermarkets were the main driver of growth in the year to December.
The business lobby group said evidence from the 109 firms surveyed suggested that online sales on Black Friday and Cyber Monday - considered two of the busiest shopping days of the year - were “unspectacular”.
Alpesh Paleja, principal economist at the CBI:
Retailers have seen decent growth heading into the vital Christmas trading period, although it was weaker than expected. It’s clear that people are stocking up on food for their Christmas lunch, with grocers’ sales driving most of the sales growth seen in December.
Notwithstanding the sales growth seen in the last couple of months, underlying trading conditions are tough for retailers. We expect the squeeze on real pay for households to last a while longer, so retailers will still face challenging conditions ahead.
Of those surveyed, 37% of retailers said that sales volumes were up in the year to December, while 17% said they were down. The resulting balance of +20% was slower than the +30% predicted by retailers, and weaker than November’s +26%.
Michel Barnier, the EU’s chief Brexit negotiator, has given a news conference, announcing that the European commission wants the transition period to end on 31 December 2020.
For all the details, follow our politics live blog here:
Christine Lagarde has insisted she and the IMF were right to be gloomy about the implications of a leave vote in the runup to the EU referendum in June 2016.
She said the numbers on the UK economy today were proving the point, adding UK growth is “a bit of a disappointment” compared with other countries.
Here is a reminder of Lagarde’s predictions before the vote:
The Guardian’s Business Today email has expanded its property coverage.
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The UK chancellor Philip Hammond says he agrees with the IMF on the urgent need for a Brexit transition deal.
One of biggest boosts we can provide to our economy is making early progress on delivering certainty and clarity about our future relationship.