Bank of England governor warns of "fork in the road" in global financial system

Bank of England (BOE) governor Mark Carney warned on Friday that the global financial system was at a "fork in the road" and counselled against countries turning inwards to focus on themselves.

"On one path, we can build a more effective, resilient system on the new pillars of responsible financial globalisation. On the other, countries could turn inwards and reduce reliance on each other's financial systems," Carney said in a speech at Thomson Reuters UK headquarters in London.

Carney, who is also the chairman of the G20's Financial Stability Board (FSB), warned that the second path would fragment pools of funding and liquidity, reduce competition, and impede cross-border investment.

"The net result would be less reliable and more expensive financing for households and businesses, and very likely lower growth and higher risks in all our economies," he said.

The outcome of the Brexit negotiations could largely influence the path the global financial system takes, said Carney.

Britain is the leading internationally-active financial center, with the largest global share of cross-border bank lending and foreign exchange trading, the second largest asset management industry, and the fourth largest insurance industry in the world, Carney said.

More foreign banks operate in Britain than in any other EU country, and around half of the world's largest financial firms have European headquarters in the country

"London is Europe's investment banker, with UK-based firms involved in over half of debt and equity issuance by EU27 borrowers," said Carney, referring to the 27 members of the European Union.

"This concentration of activity increases efficiencies and lowers fees for European end users."

This stature as a global financial hub means the UK's financial system is 10 times the size of its gross domestic product, creating exposure that needs to be regulated, said Carney.

However, the foundations of a "new responsible global financial system...are being put in place," he said.

"Such an approach would allow capital to move more freely, efficiently and sustainably between jurisdictions. With robust standards consistently applied, wholesale financial services could be brought more fully into bilateral trade agreements, keeping the global financial system open and resilient, and supporting greater trade, investment and innovation," he said.

Failure to embrace cooperation across borders would lead to disrupted capital flows and lower trade.

If authorities are not confident that their efforts to promote financial stability are reciprocated elsewhere, then concerns about the risks of openness to domestic financial stability could intensify, he warned.

"If they do, domestic authorities will act to safeguard their primary responsibilities," said Carney.

The outcome of the Brexit negotiations would be a "litmus test" for this, he said, with both the EU and Britain well-placed to reach a win-win deal over financial regulation.

Carney also announced that all firms with cross-border activities would now be asked by the BOE to inform it of their plans for the post-Brexit future. Endit