UK banks are resilient to a worst-case disorderly Brexit, but such an event will cause significant market volatility, the Bank of England said in its Financial Stability Report on Thursday.
Further, the report said most risks to financial stability from the disruption to cross-border financial services in a no-deal Brexit have been mitigated. Nonetheless, further actions by EU authorities are needed.
The FSR is prepared twice a year by the Financial Policy Committee, setting out the risks to financial stability and how the system is prepared to withstand those risks.
Stressing that financial stability is different from market stability, the FPC cautioned that significant volatility and asset price changes in markets are to be expected in case of a disorderly Brexit.
The perceived likelihood of a no-deal Brexit has increased since the start of this year. UK banks are strong enough to continue lending through a range of economic and financial shocks, the FPC noted.
Rising trade tensions have raised the risks to the global outlook. That said, the UK banking system remains resilient to those global risks, the report added.
The FPC maintained the countercyclical capital buffer at 1 percent, but expressed willingness to alter the rate as economic conditions and the overall risk environment evolve.
In all political scenarios, looser fiscal policy, higher inflation and higher interest rates appear to be on the horizon, Paul Dales, chief UK economist at Capital Economics, said.
According to the systemic risk survey, confidence in the UK financial system stability over the next three years improved. Participants of the survey cited political risk as the most challenging risk.
The survey was conducted between April 22 and May 16.
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