Brexit no longer poses the single biggest risk to financial stability, the governor of the Bank of England has said, adding Britain’s exit from the European Union is a greater threat to financial stability in Europe than in the UK.
Asked by MPs on the Treasury Select Committee if Brexit remains the biggest risk to the UK’s financial stability, Mark Carney said: “Strictly speaking, the view of the committee is no.”
However, the Canadian said Britain faces global risks and the process of adaptation to life outside the EU has the potential to “amplify” those risks.
Mr Carney said: “In the run-up to the referendum we said it was the largest risk because there were a serious of positions and possibilities in the financial sector, things that could have happened, that could have had financial stability consequences.
“So because we viewed it as the biggest domestic risk that was why the £250 billion of capital was prepositioned with us.
“We would like to say this had some success.”
He added: “But having got through the night and the day after, the scale of the amount of the risks around Brexit has gone down to the UK, but the process can amplify.”
Mr Carney said the disruption to Britain’s powerhouse financial services sector during Brexit would lead to “shortfalls in capacity” and capital liquidity being in the wrong place, which could have a greater impact on the EU than in the UK.
Mr Carney said: “I am not saying there are not financial stability risks in the UK, and there are economic risks to the UK, but there are greater short term risks on the continent in the transition than there are in the UK.”
The Bank said in November the outlook for Britain’s financial stability following the Brexit vote “remains challenging” and is dependent on an orderly exit from the European Union.
Asked whether Britain needs to thrash out a transitional deal for the financial services sector as soon as Article 50 is triggered, Mr Carney said it would be in the interest of both the UK and the EU.
He added: “It is the best mitigant to those (financial stability) risks, yes. It’s welcome.
“If there is not such a transition put in place, which in our view will have consequences, we will work to mitigate those consequences as much as possible.”
It comes after Xavier Rolet, chief executive of the London Stock Exchange Group, told the Treasury Select Committee on Tuesday the financial services industry should be handed a five-year transition period after Article 50 is triggered.
His call for a Brexit bridge was echoed by Douglas Flint, group chairman of HSBC, who said a two-to-three year transition was needed so financial firms can adapt.
However, the Government’s Brexit secretary David Davis said in December he would accept a transitional arrangement “if it’s necessary and only if it’s necessary”.
Mr Carney said Mr Flint had used a “decent analogy” when he told MPs that London’s financial ecosystem was like a Jenga tower, where if you pull one small piece out nothing could happen or it could have a dramatic impact.
The Bank governor said: “Just like when you play Jenga, you start early and there are some pieces which you can take out without imperilling the tower.”
He added that it was “very clear” that cross-border retail banking was an example of an operation which was relatively straightforward.
Treasury committee member Jacob Rees-Mogg, who has clashed with Mr Carney in the past over the Bank’s outlook on Brexit, launched a further assault.
He claimed the resilience of the UK economy in the wake of the EU referendum showed its gloomy forecasts were wrong.
It comes after Andy Haldane, the Bank’s chief economist, admitted last week that economists had become embroiled in a forecasting crisis, labelling warnings of a swift and deep downturn after the Brexit vote as a ”Michael Fish moment”.
Mr Carney said the Bank’s risk analysis around Brexit was right and the mitigating steps that it took helped reduce the severity of the risk.
“Missing the financial crisis is a big deal, a couple of good quarters is nice to have,” he added. “It is a different order of magnitude.”
Martin Taylor, an external member of the Bank’s Financial Policy Committee (FPC), said the conclusions that have be drawn “from the undoubted mis-forecasting were mostly wrong”.
He said that forecasters have been described as being hopeless, politically biased, or that there has been a miracle in the economy.
“I don’t think any of these have happened,” he added. “I think it’s much more prosaic.
“On the forecasting itself, economic models are based on what has happened in the past, there is no precedent for a major country deciding to tear up all its trade deals and go off into a new world, which does not have exact contours.”
He said: “The mistake that had been made with forecasting is to greatly overestimate the size of that confidence effect on the consumer.
“The big thing that has happened since Brexit is that people have got on with their lives, thank goodness. Increasingly, they have got on with their lives thanks to consumer credit.”