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Brexit poses 'material risks' to financial system, Bank of England warns

File photo dated 22/10/18 of a European Union flag in front of the Elizabeth Tower. Theresa May's flagship Brexit legislation is "constitutionally unacceptable" and will need to be substantially rewritten, an influential group of peers has said. PRESS ASSOCIATION Photo. Issue date: Monday January 29, 2018. Peers have raised concerns about the European Union (Withdrawal) Bill ahead of a debate on Tuesday. The peers said the Bill was "fundamentally flawed" in multiple ways and risked "undermining legal certainty". See PA story POLITICS Brexit Lords. Photo credit should read: Victoria Jones/PA Wire

The Bank of England has warned that Brexit still poses "material risks" to Britain's powerhouse financial services sector despite efforts to ease disruption.

While "progress has been made", the Bank's Financial Policy Committee (FPC) said further action was needed in areas where the UK and European Union needed to make joint commitments.

The Bank has previously stated that, to preserve the continuity of existing cross-border insurance and derivatives contracts, UK and EU legislation would be required.

Six million UK policyholders, 30 million European Economic Area (EEA) policyholders, and around £26 trillion of outstanding uncleared derivatives contracts could be affected.

Despite the cautionary note, the committee stood by its previous conclusion that Britain's banking system had the capital strength to withstand a disorderly Brexit and continue supporting the UK economy.

The FPC, which assess the financial stability risk facing the UK economy, said UK lenders did not need to further boost their capital reserves and kept its countercyclical capital buffer at 1%.

In a statement, the FPC said: "Since November, in the United Kingdom, progress has been made towards mitigating risks of disruption to the availability of financial services.

"Nonetheless, material risks remain, particularly in areas where actions would be needed by both the UK and EU authorities."

On a global scale, the committee said interest rate volatility, US corporate debt and vulnerabilities in China's financial system all presented risks to the UK economic system.

It also stressed that Britain's current account deficit was still disproportionately large compared to other countries across the globe, ramping up the nation's reliance on the confidence of foreign investors.

Bank governor Mark Carney warned in the lead-up to the Brexit vote that the UK relied on the "kindness of strangers" in order to finance the country's needs.

Focusing on the rise of cryptocurrencies, the FPC said the likes of Bitcoin did not present a risk to financial stability.

However, it stressed that standards would have to be enforced on payments and exchanges if one digital currency emerged as a widely-used form of payment.

It said: "The FPC will act to ensure the core of the UK financial system remains resilient if linkages between crypto-assets and systemically important financial institutions or markets were to grow significantly.

"In the event that one or more crypto-assets were likely to become widely used for payments, or as an asset intended to store value, the FPC would require current financial stability standards to be applied to relevant payments and exchanges."

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