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UK banks can weather forex market shutout amid Brexit uncertainty, BoE says

The U.K.'s biggest banks will be able to weather any impact from staying out of currency markets for up to three weeks in case of heightened volatility in the pound's value due to Brexit developments, Bank of England Governor Mark Carney told the House of Commons Treasury Select Committee on Oct. 15.

Aside from other precautions, Carney said that major banks in the U.K. are holding neutral positions in the foreign exchange market — similar to 2016 when the Brexit referendum caused a sharp decline in sterling — which will allow them to continue operations even if they are unable to trade sterling, euro or dollars for over 14 trading days.

Carney said the pound will likely move leading up to the Oct. 31 Brexit deadline, and the point of concern is that large banks — the core of Britain's financial system — "are not making a big bet on that, and they can’t be caught out going wrong."

Discussing a slowing economy, Carney said the Bank of England has the ability to ease its monetary policy further by cutting interest rates and resuming asset purchases in case of an economic downturn. He added that allowing banks to draw on the countercyclical capital buffer could also support the economy if all else is equal. The central bank's Financial Policy Committee decides when banks can withdraw from this fund.

A near-term Brexit deal which reduces uncertainty and allows ample time for business to prepare for any changes to the trading relationship between the two parties may spur enough investment to prevent further monetary policy easing, Gertjan Vlieghe, an external member of the BoE's Monetary Policy Committee, said the same day.

However, prolonged uncertainty could keep economic growth below potential and may require "some monetary stimulus," Vlieghe added, speaking at the MMF Monetary and Financial Policy Conference in London.

The U.K. economy contracted 0.2% on a quarterly basis in the second quarter, following a 0.6% expansion in the first quarter, and stands the risk of a technical recession if it contracts again on a quarterly basis in the third quarter.