Bank of England warns EU to take action to prevent financial havoc after Brexit

Trillions of pounds worth of contracts will effectively cease to work overnight unless Brussels implements temporary rules

The bank says 10 million UK insurance policies could be unserviceable as a result of inaction from EU regulators (PA)

The Bank of England has taken a swipe at the EU for not doing enough to prevent unprecedented disruption to the financial system after Brexit.

As a result of inaction in Brussels, “material risks remain” to trillions of pound worth of contracts once the UK leaves the EU, the BoE said in its twice-yearly financial stability report.

While the UK has put in place temporary permission for firms to continue to service contracts across the border with the EU after Brexit, European regulators have not done so, the BoE said.

It said 10 million UK insurance policies could be “unserviceable” as a result, along with 38 million EU policies.

Also at risk are £29 trillion worth of derivatives – contracts that derive their value from the price of an underlying asset.

Derivatives are essential for the functioning of the financial system and the wider economy. They are used by many companies to limit their exposure to risk by, for example, hedging against changes in the price of commodities or movements in interest rates.

European customers are reliant on firms based in the UK being able to ensure these contracts continue to work across borders, the BoE said.

It added: “The biggest remaining risks of disruption are where action is needed by both UK and EU authorities, such as ensuring the continuity of existing derivatives contracts.

“As yet the EU has not indicated a solution analogous to a temporary permissions regime.”

The warning from Threadneedle Street to Brussels comes just two days after the European banking watchdog issued its own criticism of UK lenders, saying they weren’t ready for a hard Brexit.

On Wednesday, the BoE said UK banks are ready for that scenario and are also more prepared for a financial shock than at any time since the credit crunch, having boosted the capital reserves they set aside for future crises.

Looking beyond Brexit, the BoE’s report pointed to international risks, particularly in emerging markets, which it said could leave UK banks and investors exposed.

Some emerging economies have borrowed heavily in US dollars and now face soaring repayment costs thanks to recent US interest rate hikes alongside the falling value of local currencies.

The bank also revealed that its Financial Policy Committee will launch a new cyber attack test for UK financial firms and banks next year, the report said. It will assess how quickly financial institutions restore vital services after an attack.