Wednesday 16 October 2019

Costs of no deal crash-out by UK 'not priced in'

Hard Brexit will be bumpy for Ireland but 'not catastrophic' Central Bank deputy governor insists

Central Bank deputy governor Ed Sibley
Central Bank deputy governor Ed Sibley
Donal O'Donovan

Donal O'Donovan

Financial markets are underestimating the risk and potential impact of a hard Brexit, even with just 15 days to go before the UK could crash out of the European Union, the deputy governor of the Irish Central Bank has warned.

Ed Sibley, the Central Bank Deputy Governor responsible for prudential regulation, said: "As it stands I don't think a hard Brexit is fully priced in so there would be inevitably some market dislocation if that's where we emerge in a short number of weeks, or if there is a short delay to that."

But he said Irish banks that came through the crash were now strong enough to withstand what could be a major shock. "That's not to say an economic downturn in the UK and Ireland wouldn't be painful and difficult, but it's not to my mind of a scale that would cause us - across the system - financial stability issues," he said.

Mr Sibley has ruled himself out of the race to replace Philip Lane as Central Bank Governor when Prof Lane goes to the ECB in May, as expected. The England-born regulator who is watching Brexit unfold from Dublin said his personal response is sadness.

"Personally, I am deeply saddened by it. I think it is entirely regrettable - albeit understandable in some respects. It is to the detriment of the UK and to the detriment of the EU and it's really unfortunate that Ireland is going to suffer collateral damage as a result."

Crucially, however, he thinks the fallout from a hard Brexit would not be made worse by contagion in the banking system looping back into the economy.

"That is based on not just the work of the last three years when we've done a lot of specific work on Brexit, but on the work of the last decade," he told the Irish Independent.

"So one can never be 100pc there isn't something that is going to cause a problem. But my view - based on all the work we've done, the analysis we've done, the interventions we've made - is that the financial system shouldn't be a cause of further problems. It should be operating to continue to serve the needs of the economy and customers, albeit given the level of market disruption that I think a hard Brexit could cause - because it is not priced in - it will be bumpy. But bumpy in a way that is not catastrophic as we have seen here before," he said.

The bigger issue for Ireland will be the wider economic impacts including on some vulnerable sectors such as agri-foods and traditional manufacturing that are heavily reliant on exports to the UK, he said. "What I have been very much focused on is to make sure, as much as we can, to mitigate the risks to the financial system such that the financial system is resilient enough to withstand the shock of a hard Brexit and resilient enough to serve what will be acute needs of the economy and customers in that scenario, rather than being an extra headache, or a cause of problems."

A decade ago, the global financial crisis triggered a so-called doom loop between banks, the real economy and national governments.

"We are in completely different circumstances for the domestic banks than we were a decade or so ago in terms of the level of capital that is in the system," Mr Sibley said. "There is three times as much - more than three times as much in terms of risk-weighted assets. Their funding profile is much more deposit-funded than on the wholesale and short-term markets - so much less vulnerable to a shock; and their business models are different. They are heavily concentrated in property but more mortgages than commercial real estate as was the case," he added.

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