A no-deal Brexit would cause disruption and might also have an impact on liquidity in financial markets, the European Union commissioner in charge of financial services said on Tuesday in a stark reminder of the risks posed by a hard Brexit.
The EU has put in place a series of contingency measures to deal with a no-deal Brexit, which in the financial sector include a temporary recognition of Britain-based clearing houses which process multi-trillion-euro derivative transactions.
But EU Commissioner Valdis Dombrovskis sounded a warning note.
“We will not be able to mitigate all possible negative economic effects,” he told the economic committee of the European Parliament in a regular hearing.
Speaking the day after the British Parliament failed again to agree on the way forward for Brexit, Dombrovskis said there was a “material risk” that Britain will leave the EU on April 12 without a divorce deal.
He warned about the economic and financial damage to the EU and Britain from a hard Brexit.
“There is going to be disruption. There may be effects on liquidity,” Dombrovskis told lawmakers.
The Bank of England and the European Central Bank have said they stand ready to provide liquidity if a no-deal Brexit risked freezing markets.
But liquidity can still be affected by a limitation imposed on EU money managers for their trading in shares listed in Britain’s stock exchanges, an EU official said.
Trading venues, like other financial operators, need to be authorized by EU authorities if they want to service EU clients from a country outside the bloc.
After Brexit, London-based operators would be treated as foreign, meaning they will have to wait for possible authorization which may take years.
Brexit was seen as one of the main risks to the EU’s financial stability in a confidential note prepared by the European Systemic Risk Board (ESRB),
chaired by European Central Bank President Mario Draghi, for a meeting of euro zone economic officials ahead of this week’s monthly meeting of the bloc’s finance ministers.
In a more reassuring remark, Dombrovskis said the EU financial system was robust and able to withstand a severe economic downturn. Financial stability will be safeguarded, he added.
But he reiterated his calls on banks and other financial operators to prepare for a no-deal Brexit so they could adapt to that scenario if it eventually happened.
Other disruptions to financial markets could be caused by national laws in the 27 remaining EU states which differ in interpreting rules over financial contracts with UK-based firms after Brexit.
A hard Brexit could also invalidate clauses in bond contracts issued by EU banks under English law, increasing funding problems for lenders when they need to build more buffers against possible losses under new EU and global regulations.