Leaving the EU 'biggest domestic risk to financial stability', UK's Mark Carney warns
Published 08/03/2016 | 13:49
Leaving the EU is the "biggest domestic risk" Britain faces and could have serious consequences for the housing market and City of London, the governor of the Bank of England has warned.
Giving evidence to MPs, Mark Carney said so-called Brexit would trigger a period of financial instability that could last a "very long time" and warned that some firms were likely to move their headquarters abroad.
Under tough questioning from Treasury Select Committee members, Mr Carney stressed that the Bank was not making any formal recommendation on how people should vote in the June 23 referendum.
He also flatly denied that he had been pushed by Downing Street into making a grim assessment of the potential fallout.
Mr Carney said the UK leaving was not currently the "median" expectation of financial players, and highlighted effects such as a drop in the value of the pound.
"The issue is the biggest domestic risk to financial stability, because in part of the issues around uncertainty," Mr Carney told the committee.
"But also because it has the potential - depending on how it is prosecuted and how these issues can be addressed - to amplify the risks around the current account as has been discussed, potential risks around housing, potential risks around market function which we are trying to mitigate. And also associated risks with respect to the euro area.
"It is the biggest domestic risk to financial stability. I would say that in my judgment the global risks, including from China, are bigger than the domestic risks."
He declined to repeat the language of a G20 statement last month, which said leaving the EU would result in a "profound economic shock".
In the event of a vote for Brexit, Mr Carney said the Bank "will do everything in our power to discharge our responsibility to achieve monetary stability and financial stability".
But he added that he could not "provide a blanket assurance that there would not be issues in the short term with respect to financial stability and that potential reduction in financial stability could be associated - and normally would be associated - with poor economic outcomes, as we have seen in the past".
The scale of the impact of Brexit on the financial sector would depend largely on the relationship negotiated following a vote for UK withdrawal, said Mr Carney.
Outcomes could range from full mutual recognition of regulations and standards - which would allow UK-based financial services companies to operate in the remaining EU under terms similar to the current "passporting" arrangements - to a scenario in which Britain would seek access to European markets in a similar way to any other third country, he said.
There would also be questions over whether the UK would lose its "substantial influence" over the development of EU financial regulations and would retain the flexibility enshrined in the renegotiation settlement secured by David Cameron.
Asked whether uncertainties of this kind might lead companies to relocate business activities away from the City in the event of Brexit, Mr Carney said: "One would expect some activity to move. Certainly, there is a logic to that.
"There are views that have been expressed publicly and privately by a number of institutions that they would look at it. I would say a number of institutions are contingency planning for that possibility - major institutions, foreign headquartered, which have their European headquarters here.
"There would be an impact. I can't give you a precise number in terms of institutions or jobs or activity, because we don't know where we would be on that continuum between full mutual recognition or pure third-country access."
Asked if some degree of loss of business could be expected if full mutual recognition was not retained, Mr Carney said: "Without question."
He told the MPs: "It is reasonable to expect that certain firms would take a view in terms of relocation."
Mr Carney added: "Mutual recognition arrangements are possible to achieve, but in general they take a very long time to achieve and the challenge is the degree of freedom one retains in setting one's own path, rules, approach, and maintaining that mutual recognition."
Britain would have to think through the benefits of seeking to preserve as much as possible of the City's existing business at the cost of "in effect ceding sovereignty over this aspect of our authorities" and losing flexibilities in the realm of prudential and macro-prudential regulation and supervision, which have just been reinforced by Mr Cameron's renegotiation, he said.
In a letter to the committee released as he appeared to give evidence, Mr Carney said the renegotiation deal - which will come into effect only if the UK votes to remain in the EU - "delivers a number of protections and additional tools that will help safeguard the Bank's ability to continue to achieve its statutory objectives".
He welcomed the settlement's "important commitment" to the principle that the interests of non-euro states must be safeguarded as the single currency area integrates.
Provisions allowing central banks of non-euro countries to regulate in a different way from those within the Banking Union deliver "precisely the flexibility the Bank sought ... given its responsibilities to oversee the prudential aspects of the UK's very large and complex financial sector", added Mr Carney.
"Particularly welcome" was a recognition that responsibility for the implementation of regulations on financial institutions and markets and macro-prudential responsibilities will remain with the central banks of non-euro states, he said.
A heated debate with MP Jacob Rees-Mogg saw Mr Carney accused of damaging the Bank's reputation by making "speculative" pro-EU comments without the facts to support the view.
Mr Rees-Mogg said: "It is beneath the dignity of the Bank of England to be making speculative pro-EU comments."
Mr Carney hit back at the comments, giving the example that banks are headquartered in London because of the "passporting ability" of this economy, by virtue of being a member of the EU.
Asked also why the financial transaction tax - the so-called proposed Robin Hood tax on banks - was not listed in the Bank's letter to MPs on the recent EU deal, Mr Carney said it was relatively low down on his list of concerns.
He added: "We have to make a judgment on the probability of it actually coming into force."
MP John Mann questioned the central bank boss over the impact of a Brexit on jobs, wages and prices in the UK.
Mr Carney stressed the Bank was not assessing the direct economic impact of a Brexit, but said the uncertainty surrounding the referendum could have an impact on household and business spending, while sharp falls in the value of the pound could push up inflation.
He added the Bank would still be able set monetary policy to achieve the Government's 2% inflation target should Britain vote to leave the EU, thanks to the "tools and independence we have".
Questioned by leading Tory Eurosceptic Steve Baker, Mr Carney flatly denied that he had been pushed by Downing Street into highlighting the risks of Brexit.
"We are expressing views that are the views of the institution," he said. "We are not leaned on by anybody.
"It would have no effect if they tried."
Mr Carney also suggested that Boris Johnson declaring for the Out campaign could have contributed to the slump in the value of sterling.
Asked whether the London Mayor's announcement had an impact, he replied: "The combination of having the agreement, and therefore a date for the referendum, and the tangible evidence of a campaign in favour of Leave with credible politicians as part of that - not least represented on this committee - concentrated the minds.
"I know that seems a bit odd that sometimes financial markets ignore an issue until there are focal points that make it more tangible, but this is what happens time and time again.
"It was a combination of events that focused minds."
Mr Carney said the moves in sterling were "relatively large" but "not unprecedented".