pared their exposure to Britain in the aftermath of its vote to quit the European Union, slashing their UK assets
by $425 billion in the span of a year.
The decline was driven by a 35 per cent drop in derivatives exposures, showing European banks
are preparing for the risk that the UK fails to reach an agreement on its future relationship with the bloc before its departure. Banks
in the 27 other EU
countries had € 1.59 trillion ($1.9 trillion) in total assets
tied to the UK at the end of June, about € 356 billion less than a year earlier, data from the European Banking Authority
shows. Britons voted to leave on June 23, 2016. More than one third of banks
questioned by the EBA are worried that Brexit
could upend derivatives and other financial contracts, leading to potential losses and legal risks for banks.
The EBA, which coordinates regulatory standards across the bloc, said firms need to prepare for a possible cliff-edge, in which EU
rules cease to apply in the UK and a new agreement isn’t in place when the UK exits in early 2019.
“It is important that banks
and their counterparties, as well as consumers and public authorities, consider appropriate mitigating actions and contingency plans to address these concerns,” the EBA said in the report. Regulators on both sides of the Channel have sounded the alarm about the risks Brexit
poses to derivatives and other financial contracts.
The Bank of England has said a “comprehensive solution” is needed as part of the Brexit
process to protect the “long-term validity” of 20 trillion pounds ($26.7 trillion) of existing derivative contracts. European Central Bank President Mario Draghi has similarly warned that contract continuity could be imperiled.
“Tens of thousands of counterparties could be affected, representing around a quarter of both UK and EU
client uncleared derivative contracts,” the BOE said in September.
with offices in the UK have already announced plans to shift positions to the continent after Brexit.
Britain could lose as many as 75,000 jobs in banking and insurance if it leaves the EU
without a trade deal, according to Sam Woods, Britain’s top banking regulator.
Woods, the chief of the BOE’s Prudential Regulation Authority, has said about 10,000 U.K.-based jobs are probably at risk on “day one” of Brexit.