Bank of England deputy governor Sam Woods used a letter to the Treasury Committee (2-page / 1MB PDF) to repeat calls for "some form of implementation period" for post-Brexit arrangements, in order to "give UK and EU firms more time to make the necessary changes to adjust to the UK's new relationship with the EU in an orderly way".
Woods said that issues arising from the UK's exit from the EU "pose a material risk" to the objectives of the Prudential Regulation Authority (PRA), making this area of work a "top priority" for the regulator.
"It is incumbent on us to manage this burden but we may have to make some difficult prioritisation decisions in order to accommodate it," he said.
Conservative MP Nicky Morgan was elected chair of the Treasury Committee last month, replacing Andrew Tyrie, who stood down as an MP at the June 2017 general election. One of her first actions as chair was to write to Woods to request more information about an information-gathering exercise conducted by the PRA into banks' and insurers' Brexit contingency plans.
Woods said that all UK firms and material branches of EEA firms who received the request responded by a July 2017 deadline, with the exception of "a handful of very small insurers". The PRA was "in the process" of analysing all 401 responses in detail, and would provide the committee and government with further information about the results of its work once complete.
However, he said the responses clearly indicated firms' concerns about their ability to service existing contracts in the event of a so-called 'hard Brexit' scenario, as well as potential restrictions in relation to data transfers.
"It is clear that these are significant issues for many firms, and that planning assumptions (in particular, whether these issues are expected to be resolved by the authorities or by individual firms) vary considerably," Woods said.
"In this context, for insurance firms there is a possibility of a significant increase in the volume of Part VII transfers to move contracts between entities. We are engaging further with firms and trade bodies to examine the possible mitigants to these risks and determine which are likely to be most effective," he said.
In June, five of the UK's major business organisations signed an open letter to the government calling for it to secure 'transitional' access to the EU's single market until the final terms of the UK's departure from the EU are agreed and implemented. The UK is due to leave the EU by the end of March 2019.
UK prime minister Theresa May has said previously that leaving the EU meant the UK would have to leave the single market. However, experts at Pinsent Masons, the law firm behind Out-Law.com, have pointed out that the result of June's early general election could have weakened May's mandate for a so-called 'hard Brexit'.
Ending access to the EU's single market will impact particularly on financial firms, who would lose their 'passporting' rights to do business in other EU member states. Many firms are investigating the possibility of setting up new subsidiaries in mainland Europe or in the UK in order to continue to allow them to operate cross-border, which will increase the workload of the PRA and its European counterparts.
"Re-structuring by firms to mitigate risks to their business will in general increase complexity," Woods said in his letter to the Treasury Committee.
"In particular in relation to 'outbound' firms (those firms based in the UK but selling services to clients in the EU) for both banks and insurers, re-structurings will in many cases result in strongly inter-connected entities between the UK and the EU. We will need to ensure that these structures do not impede supervisability or resolvability," he said.
More generally, the PRA and the Financial Policy Committee (FPC), which deals with 'macro-prudential' risks to financial stability, were focusing on the potential effect of Brexit on the provision of financial services in both the EU and the UK, and the risk of "broader" UK economic disruption, Woods said.
"The UK's withdrawal from the EU has the potential to affect the economy through supply, demand and exchange rate channels," he said. "This could require banks to be able to withstand, and continue lending in, an environment of higher loan impairments, increased risk of default and lower asset prices and collateral values."
The Bank of England's regular stress tests of the major banks was intended to "strengthen banks to withstand scenarios of this kind", he said.