HSBC Holdings Share News (HSBA)

By Huw Jones

LONDON, March 16 (Reuters) - The risk of disrupted insuranceand derivatives contracts for customers is "material" unlessBritain and the European Union take joint action ahead ofBrexit, the Bank of England said on Friday.

Britain has made progress towards mitigating risks ofdisruption to financial services after it leaves the bloc nextMarch, the BoE's Financial Policy Committee (FPC) said in astatement about its March 12 meeting.

"Nonetheless, material risks remain, particularly in areaswhere actions would be needed by both the UK and EUauthorities," the FPC said.

Britain and the EU aim to agree a Brexit transition dealnext week to avoid a disorderly exit in 2019 but further stepswere needed to ensure "continuity" of financial contracts.

Britain has signalled it will adopt legislation, but so farthe EU has not reciprocated.

Financial industry officials say the EU may not act untilthe last minute in order to put maximum pressure on banks andinsurers based in Britain to open new hubs in the bloc ahead ofBrexit.

Without action, insurers in Britain and the EU may not beable to pay claims on policies or receive premiums.

There is particular concern over uncleared derivativescontracts worth a notional 26 trillion pounds, which need atemporary permissions regime to service them.

"EU authorities have not announced their intention to grantsuch permissions," the FPC said.

Robert Ophele, chair of France's markets watchdog, said onThursday that public authorities should provide adequate legalsupport for continuity of contracts, possibly through provisionsin Britain's withdrawal agreement with the EU.

But ratification of that agreement is not expected untilOctober or later, though a transition deal this month couldallow regulators to begin talks.

Reuters has approached the European Commission for commenton the matter.

JUNE CAPITAL REVIEW

The FPC said Britain's banking system could continue tosupport the economy if there was a disorderly departure from theEU, and that current Brexit risks don't require banks to holdmore capital.

It sent a warning to banks, however.

The committee will review in June whether the current 1percent counter-cyclical capital buffer should be raised due toother risks, such as more home loans are being granted at highloan-to-income ratios that bump up against the BoE's ceiling.

The FPC decided that this year's stress test for the mainbanks and building societies should be the same as for 2017,which was more severe than the 2007-09 global financial crisis.

The test will take into account preparations for Brexit andthe introduction of ring-fencing of retail banking arms withbespoke cushions of capital in January 2019.

This year's test will also reflect a new accounting rulethat forces banks to provision earlier for souring loans.

Rob Smith, a banking partner at KPMG consultants, said thedecision to leave the test scenario unchanged was unexpected,and shows the BoE's potential concerns about the accountingrule.

Systemic banks, such as HSBC and Barclays will face a highertest hurdle than last year, somewhere above 8 percent ofrisk-weighted asset, compared with just below that level in2017. Missing the hurdle will mean aggressive, rapid actionwould be needed to bolster capital buffers.

"The higher pass mark was also unexpected. Domestic bankswill now be assessed against systemic buffers which previouslyonly applied to global players. This might create pressure forsome of our UK focused banks," Smith said.(Reporting by Huw Jones; Editing by Toby Chopra)