April 18, 2018 / 2:16 PM / in a month

BoE's Brazier says now surer of dodging Brexit hit to derivatives

LONDON (Reuters) - The Bank of England is becoming more confident that it can avoid disruption to trillions of pounds in cross-border financial contracts after Brexit, a senior BoE official said on Wednesday.

FILE PHOTO: The Bank of England is seen in London, Britain, April 9, 2018. REUTERS/Hannah McKay/File Photo

Britain’s departure from the European Union next year could make it hard to enforce cross-border derivatives contracts used by companies to guard against adverse moves in interest rates or raw material costs.

Alex Brazier, the Bank’s director of financial stability strategy and risk, said concerted action by both Britain and the EU was needed to ensure contract continuity for derivatives contracts worth 26 trillion pounds.

Britain is willing to legislate but the EU has yet to indicate any proposed action, leaving the industry in limbo.

“I have every confidence that is what will happen by the end,” Brazier told parliament’s Treasury Committee.

He spoke with the European Central Bank on the issue this week but said he would leave it to them to announce anything they might do.

“I do know they share our analysis of the issue and are examining it as much as we are,” Brazier said.

Brazier said Britain’s main banks hold enough capital to deal with any fallout from Brexit.

JUNE DECISION

The BoE’s Financial Policy Committee, on which Brazier sits, will review in June whether to raise the so-called countercyclical capital buffer (CCYB) at banks, currently set at 1 percent.

The aim of the buffer is to help dampen credit markets and rising debt.

Brazier said 1 percent remains adequate but it was important to keep up with risks taken by banks.

But Martin Taylor and Donald Kohn, who were also being quizzed by the lawmakers on their reappointment to the FPC, signaled the buffer might be headed higher.

“What seemed to me to be the right thing to do, which we did, was not to move in March... but to leave the market with the expectation that there might be a move in the next quarter of two,” Taylor said.

“My position was one in which we should give serious consideration over the first half of the year to potentially raising that buffer a little bit,” added Kohn.

A buffer of 1.25 percent or even 1.5 percent could still be in line with the “standard” level of risks faced by banks, Kohn added.

The policymakers were also asked about the threat from banking startups to established lenders, and about cryptocurrencies.

Taylor said there could be “fireworks” if big tech giants like Amazon entered banking given their deep pockets and huge customer reach, though they could be put off by regulation.

“I suppose if they wanted to they could buy a bank,” Taylor said.

The BoE has said that cryptocurrencies pose no risks to the financial system but their underlying blockchain technology shows promise in areas like payments.

“The present cryptocurrencies seem to me to be interesting if you are a criminal,” Taylor said.

Reporting by Huw Jones and Andy Bruce; Editing by David Milliken and Hugh Lawson

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