The Bank of England has warned it could struggle with the burden of regulating London’s financial sector after the UK leaves the European Union.
Sam Woods, deputy governor and chief executive of the Prudential Regulation Authority, wrote to Nicky Morgan, who was elected chairman of the Treasury Committee last month.
He wrote: “The authorisation, and then the ongoing supervision, of a significant number of additional firms is likely to place a material extra burden on the PRA’s resources.
“It is incumbent on us to manage this burden but we may have to make some difficult prioritisation decisions in order to accommodate it.”
He explained that restructuring firms to mitigate risks will generally increase complexity, for example with firms that are based in the UK but want to sell to clients in the EU.
Woods added that risks to financial stability will deepen due to Brexit, as he gave his backing to securing a transitional exit deal.
Woods wrote that financial services are in danger of becoming dislocated and fragmented after Brexit.
Meanwhile if there is a broader disruption to the UK real economy due to problems with supply, demand and exchange rate channels, that could test the resilience of the financial system further.
Woods added: “This could require banks to be able to withstand, and continue lending in, an environment of higher loan impairments, increased risk of default and lower asset prices and collateral values.
“Going forward, the FPC will continue to develop and refine its assessment of the potential financial stability risks associated with the withdrawal of the EU.”
Morgan wrote to Woods last week asking for details on the City’s readiness for a hard Brexit.
She said: “I am grateful to Mr Woods for his initial thoughts on the responses that the PRA has received from banks and insurers.
“I welcome his commitment to provide further information when the PRA has completed its detailed analysis, which the Committee will undoubtedly want to consider.
“The UK leaving the European Union is a complex task. The potential extra burden on the PRA’s resources, and the risk that may pose to its objectives, is an issue that I’m sure the Committee will want to monitor.”