U.S. Markets

Bank of England official flags risk of capital flight from UK

LONDON (Reuters) - Britain has become increasingly reliant since the 2016 Brexit referendum on “flighty” foreign funding that could be withdrawn at short notice, a Bank of England official said on Tuesday.

FILE PHOTO: A man walks past the Bank of England in the City of London, Britain, February 7, 2019. REUTERS/Hannah McKay//File Photo

Three years after voting to leave the European Union, Britain is riven by political turmoil and the future of Brexit looks less clear than ever, raising questions about prospects for the world’s fifth biggest economy and its financing.

Britain runs a big current account deficit - the difference between the money flowing in an out of the country - which leaves it reliant, in the words of BoE Governor Mark Carney, on “the kindness of strangers” to pay its way.

Anil Kashyap, a U.S. academic on the BoE’s Financial Policy Committee, said the deficit itself was not necessarily a cause for concern but he was increasingly troubled by how it was financed.

“I do worry about the composition of the foreign capital that the UK relies on. Right now the stock of foreign funding is potentially more flighty than it was in 2016,” Kashyap said in a written report to lawmakers.

“To the extent that some of this flighty funding is going to the financial system and could be withdrawn at short notice, this could create cause for concern.”

The pound has fallen to five-month lows against the U.S. dollar and euro, dragged down by fears that Prime Minister Theresa May’s successor will take a more antagonistic approach towards the EU, raising the risk of a no-deal Brexit.

Boris Johnson, a former London mayor and foreign secretary who once said the EU could “go whistle” over a financial settlement with Britain, is the front-runner to replace May.

At 3.9% of economic output, Britain’s balance of payments deficit in 2018 was the largest among Group of 20 countries apart from Argentina, according to the International Monetary Fund (IMF). Official figures for the first quarter of 2019 are due on June 28.

Last year the IMF flagged Britain’s external financing as a potential concern as it had become more short-term in nature, citing wholesale bank deposits as an example.

“We are monitoring (capital flight risks) closely – including by capitalizing the UK banking system against a sharp fall in the exchange rate, and by closely monitoring the nature of UK banks’ funding,” Kashyap said.

Reporting by Andy Bruce; Editing by William Schomberg and Andrew Cawthorne