Bank of England governor urges banks to step up no-deal Brexit plans

The governor of the Bank of England (BoE) has told Britain’s biggest lenders to intensify preparations for a “no trade deal” Brexit amid growing signs of deadlock between London and Brussels.

Sky News has learnt that Andrew Bailey said during a call with bank chief executives on Tuesday that they should accelerate planning for the UK ending the transition period at the end of the year without an agreement.

The instruction came as Britain’s major high street banks grapple with the impact of the coronavirus pandemic on their balance sheets, with tens of billions of pounds of soured loans expected to materialise as a result of the crisis.

Mr Bailey’s remarks during the private call with bank bosses led one to infer that there had been a shift in the Bank of England’s assumptions about the outcome of the ongoing talks between the UK and the European Union.

Boris Johnson’s government has repeatedly ruled out seeking an extension to the transition period, with any request for a one-year or two-year extension needing to be formally lodged by the end of this month.

A final round of trade negotiations before the end-of-June deadline got underway this week, but have been hampered by an impasse over fishing rights.

The talks are scheduled to end on Friday, with a breakthrough looking elusive.

Downing Street said this week that the prime minister was likely to hold talks with Ursula von der Leyen, the European Commission president, by the end of the month.

Ending the year-long transition without a trade deal would mean the two sides trading on less attractive World Trade Organisation (WTO) terms, and have implications for banks’ corporate customers across every major sector of the economy.

It would have important consequences for trade because of the imposition of substantial tariffs, while sterling would also be set for a “fraught few months”, analysts at JP Morgan told clients in a report this week if there is no breakthrough in the talks before the end of the month.

The pound hit a four-week high against the dollar this week after The Times reported that the UK and EU were preparing to give ground to try and revive the trade talks.

In his pre-appointment hearing with MPs, Mr Bailey said a WTO outcome would increase trade barriers relative to a comprehensive free trade agreement, saying the absence of measures to ease restrictions was “likely to make trade more costly or difficult relative to a comprehensive FTA, reducing trade flows and foreign direct investment”.

On Wednesday, a senior Nissan executive repeated the Japanese carmaker’s warning that its Sunderland plant would “not be sustainable” unless the UK and the EU reached a trade deal, the BBC reported.

One banker briefed on the call between Mr Bailey and industry chiefs said Brexit had been “the number one agenda item” for Tuesday’s discussion.

Insiders said that executives from Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland, the taxpayer-backed lender, participated in the call with Mr Bailey.

The Bank of England declined to comment on the talks, but Mr Bailey’s most recent comments on the subject of Brexit have given little away.

Appearing before the Treasury Select Committee last month, the governor told MPs that “the convention is that we adopt government policy”.

“We have framed the Brexit element of that, our sort of thinking and our projections, around what the state of government policy is,” he said.

Privately, bankers say they are well-equipped to deal with an exit from the EU on WTO terms, although the overlapping COVID-19 pandemic will inevitably intensify the strain on board agendas and on their balance sheets.

Britain’s biggest lenders have been making active plans for a no-deal Brexit since the referendum that took place four years ago this month.

They have been forced to reorganise large parts of their corporate structures, establishing new EU-based entities to handle trading and customer activity within the bloc.

In December 2018, the Bank of England’s Financial Policy Committee published its analysis of what effectively amounted to the UK leaving the EU on WTO terms, saying it had “reviewed a disorderly Brexit scenario, with no deal and no transition period, that leads to a severe economic shock”.

“Based on a comparison of this scenario with the stress test, the FPC judges that the UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit.”

Widespread projections of a mass exodus of financial services workers from the City have yet to be realised, however, and in recent months, the attention of bank boards and senior managers has been almost entirely consumed by the need to deal with the coronavirus emergency.

This week, Sadiq Khan, the London mayor, urged Mr Johnson to seek an extension to the transition period.

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