The future of Brexit is bringing an uneasy tension to financial markets, with a disorderly outcome posing a significant downside risk to the euro-area economy. It could result in a downward revision of forecasts and possibly slow the process of normalizing monetary policy, blunting the projected increase in interest rates, suggests Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC).
“European policymakers, notably the European Central Bank (ECB), will strongly encourage securities regulators to impose an accommodative regulatory regime, particularly with the prospect of a hard Brexit, to preserve cross-border transactional capital flows and limit potential market instability,” writes Russell in his latest letter to the industry.
Approval for a deal requires the negotiated agreement by the British Parliament and formal ratification by each of the remaining 27 EU member states.
While most London-based financial institutions have been preparing for a no-deal scenario for at least a year, the rapidly approaching March 2019 deadline has increased the likelihood of that worst-case outcome, he writes.
There remains a lack of clarity on the regulatory arrangements in the event of a no-deal scenario, specifically the regulatory arrangement once the UK withdraws from the EU framework.
There is now a better understanding among European regulators of the magnitude of these risks and potential for market dislocation, writes Russell.