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Bank of England: No-deal Brexit could cause 'significant' market turmoil - business live Bank of England: No-deal Brexit could cause 'significant' market turmoil - business live
(30 minutes later)
The Times have written up Mark Carney’s concerns about open-ended funds.
They say:
Investment firms may be banned from allowing customers to pull out their money with a day’s notice if their underlying assets are difficult to sell, under plans being considered by the Bank of England.
Open-ended funds that invest in commercial property such as shopping centres, which can take a year to sell, may have to tell investors that they have to keep their money tied up for about a year.
UK political risk has surged in recent years, points out the Bank’s new financial stability report:UK political risk has surged in recent years, points out the Bank’s new financial stability report:
What's hot and what's not in UK financial system risk according to the latest survey from the Bank of England. pic.twitter.com/fxKfhh2k1yWhat's hot and what's not in UK financial system risk according to the latest survey from the Bank of England. pic.twitter.com/fxKfhh2k1y
During the press conference, Mark Carney was asked whether the cost of a no-deal Brexit were “vanishingly inexpensive”, as Boris Johnson breezily claimed this week.During the press conference, Mark Carney was asked whether the cost of a no-deal Brexit were “vanishingly inexpensive”, as Boris Johnson breezily claimed this week.
The governor suggested not.The governor suggested not.
Even though the banks could withstand a disorderly Brexit, the process could be very volatile.Even though the banks could withstand a disorderly Brexit, the process could be very volatile.
Carney said:Carney said:
Being ready for financial stability does not mean market stability. Markets will adjust, potentially quite substantially if there is a no-deal Brexit,Being ready for financial stability does not mean market stability. Markets will adjust, potentially quite substantially if there is a no-deal Brexit,
It also doesn’t mean economic stability. Even with a smooth adjustment it would still be a major economic adjustment, a major economic shock, virtually instantaneously.It also doesn’t mean economic stability. Even with a smooth adjustment it would still be a major economic adjustment, a major economic shock, virtually instantaneously.
.@ITVJoel asked Bank of England governor Mark Carney about Boris Johnson's claims the cost of a no-deal Brexit were “vanishingly inexpensive for us to prepare".Read more on Joel's blog here: https://t.co/5BA50AfoaJ pic.twitter.com/4ueChh6dRs.@ITVJoel asked Bank of England governor Mark Carney about Boris Johnson's claims the cost of a no-deal Brexit were “vanishingly inexpensive for us to prepare".Read more on Joel's blog here: https://t.co/5BA50AfoaJ pic.twitter.com/4ueChh6dRs
Time for one last question.....Time for one last question.....
Q: Given the important of central bank independence, what do you say to politicians who might judge your successor based on their Brexit views or their closeness to political leaders?Q: Given the important of central bank independence, what do you say to politicians who might judge your successor based on their Brexit views or their closeness to political leaders?
Hmmm, ponders Mark Carney, joking ruefully that taking one last question might be a mistake.Hmmm, ponders Mark Carney, joking ruefully that taking one last question might be a mistake.
But it’s too late now, so the BoE governor explains that part of being independent is about not giving advice when you shouldn’t give advice.But it’s too late now, so the BoE governor explains that part of being independent is about not giving advice when you shouldn’t give advice.
It’s not my position to give advice. It’s the government’s job to decide who sits on these committees.It’s not my position to give advice. It’s the government’s job to decide who sits on these committees.
But Carney then explains why independence is so valuable.But Carney then explains why independence is so valuable.
Whoever sits in these committees is guided by statutory frameworks. For the Financial Policy Committee, that means identifying risks - and taking action where possible, he outlines.Whoever sits in these committees is guided by statutory frameworks. For the Financial Policy Committee, that means identifying risks - and taking action where possible, he outlines.
Sometimes that means an uncomfortable message comes out, that a certain domestic policy or international development has a real risk to financial stability.Sometimes that means an uncomfortable message comes out, that a certain domestic policy or international development has a real risk to financial stability.
We have a statutory duty to reveal our thinking on that risk, and take action to mitigate that risk where we can.We have a statutory duty to reveal our thinking on that risk, and take action to mitigate that risk where we can.
That is the strength of the FPC.That is the strength of the FPC.
My colleague Richard Partington asks Mark Carney about the ‘tragedy of the horizon’ [where short-term focused companies won’t consider the climate emergency until it’s too late]My colleague Richard Partington asks Mark Carney about the ‘tragedy of the horizon’ [where short-term focused companies won’t consider the climate emergency until it’s too late]
Q: Is disclosure and stress-testing really adequate to tackle the market failure of the ‘tragedy of the horizon’? Isn’t it time to use macro-prudential tools, credit guidance, or green QE, as the climate activists outside say?Q: Is disclosure and stress-testing really adequate to tackle the market failure of the ‘tragedy of the horizon’? Isn’t it time to use macro-prudential tools, credit guidance, or green QE, as the climate activists outside say?
Carney says that climate policy is the solution to the tragedy of the horizon -- carbon pricing, for example, can drag issues into the present day.Carney says that climate policy is the solution to the tragedy of the horizon -- carbon pricing, for example, can drag issues into the present day.
So if public policy is credible, then the financial sector can play a huge role in driving it - if they have transparent information (which is where disclosure comes in). The system needs to be ready to help (thus the stress-testing).So if public policy is credible, then the financial sector can play a huge role in driving it - if they have transparent information (which is where disclosure comes in). The system needs to be ready to help (thus the stress-testing).
Q: What is your message to political leaders on Brexit, about what still needs to be done?Q: What is your message to political leaders on Brexit, about what still needs to be done?
Mark Carney says there is “more to be done” in terms of creating capacity and infrastructure for Britain’s new trade relations with the EU.Mark Carney says there is “more to be done” in terms of creating capacity and infrastructure for Britain’s new trade relations with the EU.
Europe is lagging behind on port infrastructure, it appears.Europe is lagging behind on port infrastructure, it appears.
In the financial sector, there isn’t adequate protection for certain cross-border derivative contracts.In the financial sector, there isn’t adequate protection for certain cross-border derivative contracts.
On data, the UK has already recognised EU data laws after Brexit, but the EU has not, even though the rules are the same. That creates a legal risk, which creates an incentive to separate data - which isn’t easy (or always safe).On data, the UK has already recognised EU data laws after Brexit, but the EU has not, even though the rules are the same. That creates a legal risk, which creates an incentive to separate data - which isn’t easy (or always safe).
That’s what we know, Carney concludes. But “it’s the things you don’t know that get you in the end”.....That’s what we know, Carney concludes. But “it’s the things you don’t know that get you in the end”.....
Q: Are you satisfied with Deutsche Bank’s restructuring (which is shedding 18,000 jobs).Q: Are you satisfied with Deutsche Bank’s restructuring (which is shedding 18,000 jobs).
Deputy governor Sam Woods says Deutsche Bank has well-known problems. The BoE welcomes its “ambitious plan”, but will work with DB to see how the plan is implemented.Deputy governor Sam Woods says Deutsche Bank has well-known problems. The BoE welcomes its “ambitious plan”, but will work with DB to see how the plan is implemented.
Q: The Financial Stability Report mentions Facebook’s Libra cryptocurrency - what are your concerns?Q: The Financial Stability Report mentions Facebook’s Libra cryptocurrency - what are your concerns?
Mark Carney explains that G7 countries have created a working group to understand Facebook’s proposition, and consider the risks and opportunities.Mark Carney explains that G7 countries have created a working group to understand Facebook’s proposition, and consider the risks and opportunities.
The issues are very broad-based, he warns.The issues are very broad-based, he warns.
1) It’s either successful or it isn’t. If it’s successful, it becomes systemic. So it’s 5-sigma, it has to be on all the time. It can’t have teething problems. People can’t be losing money.1) It’s either successful or it isn’t. If it’s successful, it becomes systemic. So it’s 5-sigma, it has to be on all the time. It can’t have teething problems. People can’t be losing money.
The standards are in a different zipcode than in other forms of technology.The standards are in a different zipcode than in other forms of technology.
2) The second issue: the actual design of the stable coin. There can’t be any basis risk, or rebalancing risk, to moving money in and out of the coin. That could create speculation in something that has to be absolutely stable.2) The second issue: the actual design of the stable coin. There can’t be any basis risk, or rebalancing risk, to moving money in and out of the coin. That could create speculation in something that has to be absolutely stable.
3) Managing the underlying assets will be a challenge, given the flows in and out.3) Managing the underlying assets will be a challenge, given the flows in and out.
4) Fundamentally there are issues about money laundering and terrorist financing.4) Fundamentally there are issues about money laundering and terrorist financing.
Carney’s broad message to Facebook: Libra needs to be right, or regulators won’t let it get near customers:Carney’s broad message to Facebook: Libra needs to be right, or regulators won’t let it get near customers:
This is not ‘learn on the job’ stuff. It needs to be rock solid right from the start, or it’s not going to start.This is not ‘learn on the job’ stuff. It needs to be rock solid right from the start, or it’s not going to start.
Having said all that, the governor also thinks Libra could be valuable to consumers.Having said all that, the governor also thinks Libra could be valuable to consumers.
It is way too expensive and slow to do domestic payments,and far too expensive to send money across borders.It is way too expensive and slow to do domestic payments,and far too expensive to send money across borders.
So if Libra isn’t the solution to financial exclusion, we need to identify something else that is, he adds.So if Libra isn’t the solution to financial exclusion, we need to identify something else that is, he adds.
Back to open-ended funds such as Woodford.Back to open-ended funds such as Woodford.
Q: Are you saying this is the end for funds that promise daily liquidity... and if so, could you actually create the problems you’re trying to solve if investors run to the doors now?Q: Are you saying this is the end for funds that promise daily liquidity... and if so, could you actually create the problems you’re trying to solve if investors run to the doors now?
Carney says the danger is that investors only learn there’s a problem when there’s a financial shock. Then they all try to cash out, and the market seizes up (as the asset manager simply can’t sell illiquid assets fast enough).Carney says the danger is that investors only learn there’s a problem when there’s a financial shock. Then they all try to cash out, and the market seizes up (as the asset manager simply can’t sell illiquid assets fast enough).
[explainer: an illiquid asset could be an office block, or a stake in a private company that can’t be sold on the stock market].[explainer: an illiquid asset could be an office block, or a stake in a private company that can’t be sold on the stock market].
Q: What’s your message to the protesters asking you to do more on climate change, and put your money where your mouth is?Q: What’s your message to the protesters asking you to do more on climate change, and put your money where your mouth is?
Carney defends the Bank’s track record, saying it has taken a lead forcing financial institutions to show their exposure to climate change. This is the TCFD [Task Force on Climate-related Financial Disclosures] rules, which the Bank itself is now following.Carney defends the Bank’s track record, saying it has taken a lead forcing financial institutions to show their exposure to climate change. This is the TCFD [Task Force on Climate-related Financial Disclosures] rules, which the Bank itself is now following.
Now we need a system that can use that data, and manage the move to a climate-neutral future, the governor explains.Now we need a system that can use that data, and manage the move to a climate-neutral future, the governor explains.
He says the Bank’s upcoming stress tests will show if banks and other financial companies are resilient enough to survive a range of future scenarios.He says the Bank’s upcoming stress tests will show if banks and other financial companies are resilient enough to survive a range of future scenarios.
That will have a huge impact in terms of the preparedness of the system.That will have a huge impact in terms of the preparedness of the system.
Then it’s up to politicians (and ultimately the public) to decide where the system is going.Then it’s up to politicians (and ultimately the public) to decide where the system is going.
My colleague Larry Elliott bowls a tempting delivery at the governor....My colleague Larry Elliott bowls a tempting delivery at the governor....
Q: Are you interested in becoming the next head of the International Monetary Fund?Q: Are you interested in becoming the next head of the International Monetary Fund?
Mark Carney says it is an “absolute privilege” to do his current job.Mark Carney says it is an “absolute privilege” to do his current job.
He praises Christine Lagarde’s work at the IMF, citing structural changes she’s driven including adding China’s Renminbi to the Special Drawing Rights Basket used by the IMF to fund its work.He praises Christine Lagarde’s work at the IMF, citing structural changes she’s driven including adding China’s Renminbi to the Special Drawing Rights Basket used by the IMF to fund its work.
Carney says we must respect the process. Lagarde has been nominated to be president of the ECB - she is “extremely well-suited” to that role, but she’s not been appointed yet.Carney says we must respect the process. Lagarde has been nominated to be president of the ECB - she is “extremely well-suited” to that role, but she’s not been appointed yet.
Once she is, there will be an “open, transparent and merit-based” process to replace her... and that’s the right time to answer that question, he concludes, tucking his bat behind his pad carefully.Once she is, there will be an “open, transparent and merit-based” process to replace her... and that’s the right time to answer that question, he concludes, tucking his bat behind his pad carefully.
Mark Carney says the Bank is “disappointed” that there hasn’t been enough progress globally in tackling open-ended funds.Mark Carney says the Bank is “disappointed” that there hasn’t been enough progress globally in tackling open-ended funds.
The problem is that they promise instant liquidity, but can’t provide it if investors rush to the exits at once.The problem is that they promise instant liquidity, but can’t provide it if investors rush to the exits at once.
Carney says the shuttering of Neil Woodford’s Equity Income fund is an investor protection issue, not a financial stability one. But it is symptomatic of a broader problem.Carney says the shuttering of Neil Woodford’s Equity Income fund is an investor protection issue, not a financial stability one. But it is symptomatic of a broader problem.
Our sense is that the financial stability risks from such funds are increasing. Our sense is that the financial stability risks from such funds are increasing, he adds.
On Brexit preparations, Carney says UK companies have made “real progress”.On Brexit preparations, Carney says UK companies have made “real progress”.
But there is still more to do. Some UK exporters are not “all the way there” yet.But there is still more to do. Some UK exporters are not “all the way there” yet.
Also, the UK cannot fully insulate itself from financial spillovers from Europe.Also, the UK cannot fully insulate itself from financial spillovers from Europe.
Onto questions.....Onto questions.....
Q: Are you really saying that it there is a massive global trade war, and a disorderly Brexit at the same time, the UK banking sector would be strong enough?Q: Are you really saying that it there is a massive global trade war, and a disorderly Brexit at the same time, the UK banking sector would be strong enough?
“The short answer is yes,” replies governor Mark Carney. The Bank has concluded that commercial banks have enough capital to absorb a disorderly Brexit rather than amplifying it.“The short answer is yes,” replies governor Mark Carney. The Bank has concluded that commercial banks have enough capital to absorb a disorderly Brexit rather than amplifying it.
The scenarios in the UK’s latest bank stress tests are actually more severe than a simultaneous trade war and no-deal Brexit, Carney explains. The banks passed those tests, so they could survive a trade war and no-deal Brexit, even if they occurred at the same time.The scenarios in the UK’s latest bank stress tests are actually more severe than a simultaneous trade war and no-deal Brexit, Carney explains. The banks passed those tests, so they could survive a trade war and no-deal Brexit, even if they occurred at the same time.
“Nobody wants a global trade war... nobody wants a disorderly Brexit” Governor Carney tells me when I ask if he really thinks the banks would be strong enough if a global trade war occurred at the same time as a disorderly Brexit...“Nobody wants a global trade war... nobody wants a disorderly Brexit” Governor Carney tells me when I ask if he really thinks the banks would be strong enough if a global trade war occurred at the same time as a disorderly Brexit...
Q: If that happened, would you rather tackle it from another role, perhaps as head of the IMF?Q: If that happened, would you rather tackle it from another role, perhaps as head of the IMF?
Carney says he will guarantee an “orderly transition” to his successor at the Bank of England.Carney says he will guarantee an “orderly transition” to his successor at the Bank of England.
I think that’s a pledge not to suddenly quit the Bank. Carney’s term ends in January.I think that’s a pledge not to suddenly quit the Bank. Carney’s term ends in January.
IMF chief Christine Lagarde is due to move to the European Central Bank at the start of November, assuming she’s confirmed in October.IMF chief Christine Lagarde is due to move to the European Central Bank at the start of November, assuming she’s confirmed in October.
Asked about the vacancy at the IMF, Mark Carney says he is "committed to be here" at the Bank of England - he will make sure there is an orderly transition to his successor. Note: he is due to leave in January.Asked about the vacancy at the IMF, Mark Carney says he is "committed to be here" at the Bank of England - he will make sure there is an orderly transition to his successor. Note: he is due to leave in January.
On the climate emergency, Mark Carney says the companies who adapt to a low-carbon future will thrive, while those which fail will “cease to exist”.On the climate emergency, Mark Carney says the companies who adapt to a low-carbon future will thrive, while those which fail will “cease to exist”.
He says the Bank’s next stress tests, in 2021, will test companies for their preparation on climate change -- a world first, he declares (see this post for more details).He says the Bank’s next stress tests, in 2021, will test companies for their preparation on climate change -- a world first, he declares (see this post for more details).
Carney turns to another financial threat -- open-ended funds which invest in illiquid assets.Carney turns to another financial threat -- open-ended funds which invest in illiquid assets.
The problem is that fund managers cannot access capital fast enough if too many investors try to redeem their money. This is likely to encourage investors to check out (rather than languish at the back of the queue) creating a “self-reinforcing dynamic”.The problem is that fund managers cannot access capital fast enough if too many investors try to redeem their money. This is likely to encourage investors to check out (rather than languish at the back of the queue) creating a “self-reinforcing dynamic”.
Anyone with money locked up with Neil Woodfood knows exactly what Carney means.Anyone with money locked up with Neil Woodfood knows exactly what Carney means.
This is a global problem, Carney cautions.This is a global problem, Carney cautions.
Governor Carney is running through the key points we covered earlier -- the UK financial system is ready for a no-deal Brexit, but there would still be major market volatility.Governor Carney is running through the key points we covered earlier -- the UK financial system is ready for a no-deal Brexit, but there would still be major market volatility.
Turning to the rest of the world, Carney points out that global business confidence has been hit by worries about a global trade war. Markets are pricing in lower growth rates, and lower corporate profits, he adds.Turning to the rest of the world, Carney points out that global business confidence has been hit by worries about a global trade war. Markets are pricing in lower growth rates, and lower corporate profits, he adds.
There are reasons to worry, he adds. For example, credit growth in China is growing faster than earnings growth, and emerging markets are vulnerable to capital outflows.There are reasons to worry, he adds. For example, credit growth in China is growing faster than earnings growth, and emerging markets are vulnerable to capital outflows.
Mark Carney begins by pointing out that Brexit is the single most important determinant of the UK’s economic outlook.Mark Carney begins by pointing out that Brexit is the single most important determinant of the UK’s economic outlook.
Material risks still remain, he warns, even though firms are more prepared for Brexit.Material risks still remain, he warns, even though firms are more prepared for Brexit.
Carney also warns that there could be disruption to cross-border financial links unless EU regulators do more -- that would hurt EU-based families and businesses, and possibly those in the UK too.Carney also warns that there could be disruption to cross-border financial links unless EU regulators do more -- that would hurt EU-based families and businesses, and possibly those in the UK too.