Bank of England says finance sector needs transitional Brexit deal soon

LONDON (Reuters) - A transitional deal "sooner rather than later" on Britain's exit from the European Union would ensure Brexit does not undermine financial stability, a senior Bank of England official said on Wednesday.

It would be in the interests of both Britain and the rest of the European Union to maintain a "good degree" of integration between their respective financial markets after the UK leaves the bloc, Sam Woods, a deputy governor of the Bank of England, told a parliamentary committee.

"The harder the border in the financial services space, the more complex is likely to be the structure firms adopt," Woods told the Treasury Select Committee.

Britain has said it will trigger divorce talks with the EU by the end of March, and finance minister Philip Hammond said on Monday he expected discussion on a bridging deal early on in those talks.

Woods said clarity on a transition period sooner rather than later was the most important thing as trading banks, wholesale banking, clearing, and asset management would be most affected by Brexit in the financial services sector and may face "non-trivial restructurings".

Brexit would be "no big deal" for retail and commercial banking, and life and general insurance.

All financial firms directly affected by Brexit would like a transition period between leaving the EU and the start of new trading terms with the bloc, Woods said. More complex firms are harder to supervise and close down if they get into trouble, he said.

"The smoother the adjustment is, the lower are likely to be the risks to financial stability."

A Britain without access to the EU market after Brexit would not be a good outcome, he said.

"I am not pessimistic. I am just making the point that an outcome that we were somehow cut off in the financial services arena in the ability to access that market in a thorough way, I think would be bad," Woods said.

It was not clear yet what the government's plan for EU market access was, and how the EU would respond to it, he added.

Woods said clarity was needed quickly as firms would make their first set of decisions on relocation within months.

The BoE's Prudential Regulation Authority, which Woods heads, has already looked at banks' Brexit plans.

Woods was asked if warnings from banks about not being able to secure EU market access was simply special pleading. "It would be wrong to be complacent about the risks," he said.

(Reporting by Huw Jones; Editing by Jane Merriman and Susan Fenton)