Belfast Telegraph

Financial markets 'underestimating' hard Brexit impact

Alarmed: Ed Sibley
Alarmed: Ed Sibley

By Donal O'Donovan

Financial markets are underestimating the risk and potential impact of a hard Brexit, even with just 15 days to go before the UK could crash out of the European Union, the deputy governor of the Irish Central Bank has warned.

Ed Sibley, the Central Bank deputy governor responsible for prudential regulation, said Irish banks that came through the crash were now strong enough to withstand what he said could be a major shock.

But he added: "As it stands, I don't think a hard Brexit is fully priced in, so there would be inevitably some market dislocation if that's where we emerge in a short number of weeks, or if there is a short delay to that.

"That's not to say an economic downturn in the UK and Ireland wouldn't be painful and difficult, but its not to my mind of a scale that would cause us - across the system - financial stability issues."

Mr Sibley has ruled himself out of replacing Philip Lane as Central Bank Governor when he goes to the ECB in May.

The regulator, who is from England and watching Brexit unfold from Dublin, said: "I am deeply saddened by it (Brexit). I think it is entirely regrettable, albeit understandable in some respects. I think it is to the detriment of the UK and to the detriment of the EU and it's really unfortunate that Ireland is going to suffer collateral damage as a result."

However, he thinks the fallout from a hard Brexit would not be made worse by contagion in the banking system looping back into the economy.

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"That is based on not just the work of the last three years, when we've done a lot of specific work on Brexit, but on the work of the last decade," he said.

"One can never be 100% there isn't something that is going to cause a problem, but my view, based on all the work we've done, the analysis we've done and the interventions we've made, is that the financial system shouldn't be a cause of further problems.

"It should be operating to continue to serve the needs of the economy and customers, albeit given the level of market disruption that I think a hard Brexit could cause - because it is not priced in - it will be bumpy.

"But bumpy in a way that is not catastrophic, as we have seen here before."

He said that the bigger issue for Ireland will be the wider economic impacts, including on some vulnerable sectors such as agri-foods and traditional manufacturing that are heavily reliant on exports to the UK.

"What I have been very much focused on is to make sure, as much as we can, to mitigate the risks to the financial system, so that the system - as I touched on earlier - is resilient enough to withstand the shock of a hard Brexit and resilient enough to serve what will be acute needs of the economy and customers in that scenario rather than being an extra headache or a cause of problems," Mr Sibley said.

A decade ago the global financial crisis triggered a so-called 'doom loop' between banks, the real economy and national governments.

"We are in completely different circumstances for the domestic banks than we were a decade or so ago in terms of the level of capital that is in the system. There is three times as much - or more than three times as much - in terms of risk-weighted assets," said Mr Sibley.

"Their funding profile is much more deposit-funded than on the wholesale and short-term markets - and so much less vulnerable to a shock - and their business models are different.

"They are heavily concentrated in property but more mortgages than commercial real estate, as was the case."

Belfast Telegraph