Bank of England issues new Brexit warning over financial instability

Britain's economy faces a "challenging period" which could undermine financial stability in the short term, the Bank of England (BoE) said on Thursday (22 September).

Despite better-than-expected economic data in the months following the European Union referendum, the BoE said Britain faced a challenging period of adjustment after voting in favour of leaving the 28-country bloc.

"Although financial stability has been maintained in the United Kingdom through a period of volatility [...] the United Kingdom faces a challenging period of uncertainty and adjustment," the BoE's Financial Policy Committee (FPC) said in its quarterly statement.

The BoE also urged the government not to loosen regulations for the banking sector.

"Irrespective of the particular form of the United Kingdom's future relationship with the EU," Britain's financial system needed "robust prudential standards".

"This will require a level of resilience to be maintained that is at least as great as that currently planned, which itself exceeds that required by intentional baseline standards," the FPC said.

The future of Britain's financial services sector remains unclear amid ongoing uncertainty surrounding the so-called passporting rights, which seamlessly allows UK firms to operate throughout the European Union's single financial services market.

Earlier this week, Jens Weidmann, the president of the Deutsche Bundesbank, warned banks and financial institutions based in Britain will lose their passporting rights unless the UK remains part of the European Economic Area after Brexit.

The government is expected to come under a lot of pressure to ensure London remains an attractive destination for financial firms and the Confederation of British Industry has already called for lenders to be removed from the "naughty step".

Meanwhile, the BoE also added that while the depreciating pound could help the country's current account deficit it could lead to higher borrowing costs.

"The risk remains of a fall in overseas investors' appetite to invest in the United Kingdom," it said in the statement.

"Any disorderly adjustment in capital flows would be associated with tighter funding conditions for the UK real economy."