The International Monetary Fund (IMF) has included Brexit among key risks to the stability of the global economy in a new report.
The organisation has called for financial institutions to “step up their preparations for a post-Brexit landscape” and include measures for a no-deal Brexit “in as much detail as possible”.
In its two-yearly health assessment of the global financial system, the IMF said that “growing anxiety” about a breakdown in negotiations between Britain and the EU could lead to uncertainty in the UK and elsewhere.
Should such pressures hit one of the world’s largest economies it could trigger a “sharp tightening of global financial conditions”, the report says.
The IMF’s assessment comes after the Bank of England warned that an estimated £41 trillion of derivatives face legal uncertainty after Brexit on March 29, unless the EU takes action to ensure continuity of existing rules.
The UK is passing legislation through Parliament to allow EU-based providers of insurance policies and centrally cleared derivatives to continue to service their UK customers. But the EU has yet to take similar action.
The IMF’s warning was included in the latest edition of its Global Financial Stability Report, which is one of the most comprehensive reviews it has carried out since the 2008 crash. It highlighted short-term risks that could affect the UK and EU during the Brexit transition period, which is slated to end on December 31 2020.
The report says that ensuring continuity of contracts is “one of the most pressing issues” for derivatives in the short-term. Meanwhile, an estimated £55 billion of insurance contracts by UK insurers to EU policyholders could be disrupted if City-based companies lose authorisation to service policies in the EU.
Along with these short-term risks, the IMF says Brexit could have financial stability implications for the EU and UK systems that go beyond the transition period.
A disorderly transition for derivatives could hit market liquidity, while banks’ risk-management practices could be undermined by complexities if they have to deal with two separate regimes.
Furthermore, there could be legal implications for data storing and sharing, which could hamper regulators’ ability to monitor risks. The IMF recommended the UK and Brussels to set up permanent bodies that would work together to make sure regulation is harmonised.
It also advised that authorities in the EU and UK should continue working with the private sector to reduce risk of disruption, with “special attention” to arrangements that could be needed if no deal is reached.
Growing anxiety about a breakdown in Brexit negotiations could give rise to contractual and operational uncertainties in the United Kingdom and elsewhere in Europe
Meanwhile, more clarity is needed over which institutions are responsible for what in order to reduce “possible cliff-edge risks and facilitate continuity of services”.
“A sharp tightening of global financial conditions could be triggered by a further escalation of trade tensions or by a sudden shift in risk sentiment caused by rising geopolitical risks or policy uncertainty in major economies,” the report says.
“For example, uncertainty about fiscal policy in some highly indebted euro area countries could damage confidence in financial markets, while growing anxiety about a breakdown in Brexit negotiations could give rise to contractual and operational uncertainties in the United Kingdom and elsewhere in Europe.”
Escalating trade tensions between the US and China and difficulties facing emerging markets could also pose “significant” risks to global stability and growth, the report said.
On Tuesday, the IMF downgraded global economic growth to 3.7% for both 2018 and 2019 – 0.2% lower for both years than had been forecast in April.
It listed the potential failure of Brexit negotiations and “unsettled” politics among the risks to global prosperity.