Report: 'Brexit' move raises risks to US financial stability

AP News
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Posted: Jul 25, 2016 3:04 PM

WASHINGTON (AP) — Britain's decision to quit the European Union has elevated the risks to U.S. financial stability, though they remain moderate, U.S. Treasury Department experts say.

The report issued Monday by Treasury's Office of Financial Research comes a day after global finance officials promised to protect the world economy from the shockwaves of Britain's "Brexit" referendum last month and to boost sluggish growth.

The vote, which surprised financial markets and was a "negative shock" to investor confidence, brings in months or years of uncertainty over British finance, trade and investment, the OFR report says. Because Britain's economy and financial system are so closely connected with the U.S. and the rest of Europe, distress in Britain could threaten U.S. financial stability, it warned.

"Brexit was a shock," OFR Director Richard Berner told reporters. "It creates uncertainty both in financial markets and among business people. ... There's still uncertainty to come."

Financial markets, especially the U.S. stock market, were rocked by the June 23 vote in Britain. Markets later recovered, and U.S. stocks mounted a robust rally in recent weeks. But the new report warns that markets may be underestimating the risks ahead.

In a "severe adverse scenario," shocks from Britain and Europe would threaten the stability of the U.S. financial system through disruptions in trade, financial connections among the countries and in investor confidence, the report says.

Officials from the Group of 20 major economies — including the U.S., China, Britain and Germany — met in Beijing over the weekend against a backdrop of a weak global recovery that was rattled by the "Brexit" vote and trade tension over Chinese exports of low-priced steel.

U.S. Treasury Secretary Jacob Lew said ahead of the meeting that it was not the right time for coordinated action similar to that in 2008-09 following the global crisis because economies face different conditions.

"Overall, the general sense was that the outlook remains uncertain," Lew said in a statement Sunday. "There is now broad consensus that what the global economy needs is growth — not austerity — and the discussions here have focused on how best to achieve that outcome."

Lew met soon after the EU exit vote with Britain's new Treasury chief. He has said that the recent market turmoil sparked by the British vote was within bounds and doesn't have the makings of another financial crisis.