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Brexit, climate, central bank autonomy key issues for Bank of England's Bailey

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Brexit, climate, central bank autonomy key issues for Bank of England's Bailey

Steering the Bank of England through Brexit and ensuring it stays politically neutral are among the main challenges that will face Andrew Bailey when he replaces Mark Carney as governor in March next year, industry experts say.

Future-proofing the U.K. financial system against climate change is also set to be high on his agenda.

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FCA head Andrew Bailey will take over as Bank of England governor in March

Source: FCA

Bailey, a career central banker, has been head of the Financial Conduct Authority since 2016. He is understood to have beaten competition from Minouche Shafik, director of the London School of Economics and former deputy governor of the Bank of England, for the top job.

Bailey is widely viewed by the financial services industry as a safe pair of hands, and is likely to maintain a relatively low profile during his time in office, in a departure from Mark Carney's "rock star central banker" image, according to Barbara Casu Lukac, professor of banking and finance at Cass Business School, University of London.

As he steps into Carney's shoes, amid a particularly challenging period for the U.K., there are a number of pressing questions that he must address.

Brexit

"There is one massive problem that Bailey will have to deal with, and that is Brexit," Casu Lukac said in an interview. The. U.K. is set to exit the bloc next year, but terms of its departure are still to be decided.

It will fall to the new governor to forge the U.K.'s new financial relationship with the EU after Brexit, and this will mean a delicate balancing act between being a "maker" of rules that prioritize Britain's interests on the one hand, and a "taker" of rules from Brussels in order to maintain regulatory convergence.

For John Forbes, an independent consultant specialized in property funds, and a former PwC partner, it remains to be seen whether Bailey will manage to achieve this balance.

"Based on his speeches earlier this year, he sees control of the U.K.'s domestic regulatory environment as more important than maintaining regulatory alignment with the EU, even if that means sacrificing market access," he said in an email.

Bailey has said on a number of occasions this year and in 2018 that, while the U.K. must stay closely aligned with the EU, it must not end up as a "rule taker."

Maintaining independence

Making sure that the Bank of England remains free from political interference, especially as it negotiates Brexit, will be another key issue for Bailey, Casu Lukac said.

Carney drew flak from pro-Brexit politicians for his warnings about the negative economic impact of leaving the EU, with leader of the House of Commons Jacob Rees-Mogg accusing him of "talking down the pound" and MP and former Conservative Party leader Iain Duncan Smith criticizing him for reviving "project fear."

With politicians hinting that they are unhappy with the idea of an independent central bank, Bailey may have his work cut out ensuring that he maintains the bank's neutrality, Casu Lukac said.

Elsewhere in Europe, central bankers in Italy, Hungary, Cyprus and Slovenia say that they have increasingly had to fend off meddling politicians in recent years.

Climate change

Ensuring that the U.K. financial system can deal with climate change is one of the most pressing challenges that Bailey must rise to during his eight-year term, according to think tank Positive Money.

"He will guide the [BoE] through a period of profound change, as the financial system adapts to a world shaped by the climate emergency, rising inequality and technological transformation. As [CEO] of the FCA, he played an important role in developing the regulator's response to the climate crisis, and we hope he will make this issue his first priority as governor," David Clarke, head of policy and advocacy at Positive Money said in a Dec. 20 statement.

"The Bank of England's cooperation is essential in the fight against climate change, and Andrew Bailey must build on the work of his predecessor, to ensure that markets are aligned with the Paris climate goals as quickly and smoothly as possible," Clarke said.

Carney said on Dec. 18 that the Bank of England will stress-test lenders and insurers in the U.K. to see how they would cope in different climate change scenarios.

Carney, who will go on to become a United Nations special envoy on climate after stepping down from the Bank of England, warned in July that companies that did not respond to climate change would "go bankrupt."