Brexit is among key risks to the stability of the global economy, a major and comprehensive new report has found.
In its two-yearly health assessment of the global financial system, the International Monetary Fund (IMF) said “growing anxiety” about a breakdown in negotiations between the UK and EU could lead to uncertainty across the world.
The IMF 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”.
It 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.
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 per cent for both 2018 and 2019 – 0.2 per cent 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.
Ensuring continuity of contracts is “one of the most pressing issues” for derivatives in the short-term, it said.
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.
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.”