"There are risks to financial stability both in the transition to the new relationship and in the new steady state."
Speaking at Thomson Reuters, Canary Wharf, Carney said that one path would build a more effective, resilient system, but warned that "countries could turn inwards" and reduce reliance on each other’s financial systems.
That would, he says, fragment pools of funding and liquidity, reduce competition and impede cross-border investment, adding that the result would be "less reliable and more expensive financing for households and businesses, and very likely lower growth and higher risks in all our economies".
Carney added that whatever is agreed "there are risks to financial stability both in the transition to the new relationship and in the new steady state".
He said that how the Brexit negotiations conclude will be a 'litmus test' for responsible financial globalisation but believes that the high road is "both readily attainable and highly desirable for all involved".
Carney said this is because the UK and the rest of the EU have exactly the same rules governing our systems and are therefore "ideally positioned to create an effective system of deference to each other’s comparable regulatory outcomes", supported by commitments to open supervisory co-operation.
He echoed statements from the Vice Chair of the Supervisory Board of the Single Supervisory Mechanism that “both banks and supervisors must prepare for any potential scenario”.
Carney also revealed that Sam Woods, the CEO of the PRA, is writing to all firms with cross-border activities between the UK and the rest of the EU asking them to inform the Bank of their own planning in response to the UK’s decision to leave the EU.
These include subsidiaries of US investment banks based in London doing business throughout the EU under passporting arrangements, as well as UK banks doing likewise, and branches of institutions from other EU states operating in London.
Carney continued: "The main purpose of this letter is to ensure that all firms are making, and stand ready to execute in good time should the need arise, contingency plans for the full range of possible scenarios. The FPC will oversee this process of contingency planning to mitigate risks to financial stability.
"Asking firms to plan thoroughly is the hallmark of the prepared and professional approach we take to promote financial stability."
