British banks prepare for eurozone exits

BRITAIN’S banks are drawing up contingency plans in case there is a disorderly break-up of the eurozone or exit of some countries from the single currency as the sovereign debt crisis rages on, a top British regulator said yesterday.

Andrew Bailey, deputy head of the Prudential Business Unit at Britain’s Financial Services Authority (FSA), said British banks do not have large exposures to the eurozone, but must plan for the worst.

“We cannot be, and are not, complacent on this front,” Mr Bailey said at a conference.

“As you would expect, as supervisors we are very keen to see the banks plan for any disorderly consequence of the euro area crisis.

“Good risk management means planning for unlikely but severe scenarios and this means that we must not ignore the prospect of a disorderly departure of some countries from the eurozone,” he said.

“I offer no view on whether it will happen, but it must be within the realm of contingency planning,” he said.

Mr Bailey, who was chief cashier at the Bank of England, moved to the FSA as part of preparations for a shake-up of Britain’s financial supervision from 2013.

He will be deputy head of the new Prudential Regulation Authority which will be a subsidiary of the bank.

Mr Bailey has already held talks with Britain’s banks, saying lenders needed little prompting, but the lack of a mechanism for a eurozone country to exit the currency made things more complicated.

“We have been talking to them already and we will be talking to them again and asking questions,” Mr Bailey added.

“There is no roadmap out there that says this is how it happens,” Mr Bailey later told reporters.

There is already rigorous testing of systems going on, including for a possible eurozone break-up, as part of an ongoing risk management process that has stepped up considerably in recent years, bankers told Reuters last week.

Banks are constantly testing their capital, liquidity and operations, such as payments systems, for risks and as the eurozone break-up threat has risen, that feeds into the checks.

Bank of England monetary policy committee member, David Miles, said the eurozone crisis was already having a substantial impact on Britain by pushing up funding costs for banks and companies.

He echoed Mr Bailey’s view that British lenders were in a relatively strong position.

Scott Roger, a senior economist at the IMF, said there was “phenomenal” scope for contagion risk across financial markets, but there are few signs that regulators are coordinating even as the eurozone crisis deepens.

James Hickman, managing director at foreign exchange firm Caxton FX, said he strongly believed that countries would start to drop out of the eurozone, with Greece looking like a good first bet.