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IMF warns Brexit challenges could rock financial stability as FTSE index loses 2017 gains

By Colm Kelpie

The challenges posed by Brexit could undermine global financial stability, the International Monetary Fund (IMF) has warned.

Financial firms' ability to operate across jurisdictions will be curtailed, with banking set to be hardest hit by the loss of passporting rights, the Washington-based body said.

It argued that the complexity of financial entities is likely to increase after the United Kingdom leaves the European Union, posing new challenges and costs for national supervisors and regulators.

"The challenges stemming from Brexit could undermine financial stability in ways that are difficult to estimate or predict at this juncture," the IMF noted in its latest global financial stability report.

It warned that many core areas of banking, including mortgages, cross-border banking, and deposit taking rely on financial passports and that without them, banks will need to shift operations out of the UK.

That means banks are preparing for worst case scenarios, and that while duplication of some services across jurisdictions is inevitable, costs for firms will increase, the IMF report stated.

But it added benefits could also arise from a less concentrated banking system throughout Europe.

It comes as the stock index of the UK's biggest 100 companies lost all of its 2017 gains as the strengthening pound weighed on the earnings of the mostly foreign-owned firms.

The stronger pound on the back of Prime Minister Theresa May's election announcement on Tuesday is undermining earnings optimism for the more international companies on the 100-member benchmark.

Stocks are vulnerable to a rising pound because more than two-thirds of FTSE 100 company earnings are derived from operations overseas.

Sterling was just off a six-month peak against the dollar above $1.28 having surged when Ms May called an early election for June 8, seeking to strengthen her party's majority ahead of Brexit negotiations. Specialist bank Investec Ireland said the stronger pound seems to be driven by the expectation that the Conservatives will make significant gains in the election and strengthen their grip on power ahead of the Brexit negotiations.

"Apart from the initial weakness as markets guessed at what an unscheduled announcement might include, the decision to hold a snap election has been overwhelmingly supportive of the Pound," the bank said in a note to investors.

"EURGBP traded down to a four month low overnight as EURGBP saw increased volatility on illiquid markets. Against the dollar, the pound has been even more impressive, trading back to over six month highs, and completely erasing the losses experienced during the "flash crash" last October."

This week, the IMF also raised its UK growth forecast for the second time this year, saying the economy held up in the wake of the Brexit vote.

In its latest World Economic Outlook, the IMF said it now expects the British economy to grow by 2% in 2017, up from January's forecast of 1.5%.

That puts Britain among the fastest growing advanced economies this year, trailing closely behind the US and Spain, which are expected to grow 2.3% and 2.6%, respectively.

"Growth remained solid in the United Kingdom, where spending proved resilient in the aftermath of the June 2016 referendum in favour of leaving the European Union," the IMF stated.

Britain's economy is then expected to slow to 1.5% in 2018 - though that figure was revised up from January's projections for 1.4% growth.

Chancellor Philip Hammond said: "The fundamentals of our economy are strong and we continue to invest in the skills needed for a stronger and fairer Britain."

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