* Carney calls for mutual recognition of UK and EU bank
* Brexit talks will be "litmus test" for global rules
* BoE tells banks to show plans for hard Brexit by July 14
* Carney says will try to keep some euro clearing in London
* Trump not doing wholesale rollback of bank rules, says
(Adds BBH banker, background)
By David Milliken, Huw Jones and Alessandra Galloni
LONDON, April 7 Bank of England Governor Mark
Carney called on Friday for Britain and the European Union to
reach a sweeping deal to recognise each others' bank rules after
Brexit, or risk a potentially damaging hit to financial services
Speaking at Thomson Reuters' London office, Carney said the
outcome of Brexit for financial services would be a "litmus
test" for global banking rules and warned against the temptation
to try to put up barriers to capital flows.
"The United Kingdom has been at the heart of the global
economy for centuries. Throughout that period the City has
channelled the life blood of the world economy, finance," he
said in a speech.
"It is all too easy to give into protectionism, but the road
less taken is often the most rewarding."
Banks, including many from the United States and other
countries around the world, use London as their base for
operating across the European Union, making the British capital
the biggest financial centre in the region by far.
But their EU "passports", which enable them to operate
throughout Europe from a single office in London, are set to be
lost once the UK pulls out of the bloc in two years' time.
British hopes of securing a generous new deal are likely to
be contested by politicians in many EU states who were jolted by
the decision of British voters last year to leave.
Recognising the risk of future barriers, Carney said banks
had to be ready for a "hard" Brexit and set a July 14 deadline
for all cross-border finance firms operating in Britain to tell
the BoE how they would cope with an abrupt EU exit.
It is not just banks that cluster their EU operations in
Britain which face risks.
European firms which operate in London via EU passports
should be prepared to set up separately capitalised subsidiaries
in Britain and submit to BoE regulation if Britain and the EU
cannot reach a deal, the BoE's top banking regulator Sam Woods
said on Friday.
DON'T RUSH TO LEAVE
Banks are making contingency plans but Carney said they
should not rush to leave London. "In my view it would be extreme
to take precipitate action."
Lenders are concerned that Britain and the EU will not reach
a deal in time for Brexit which is due in two years' time, and
are preparing to move staff from London. Germany and France are
trying to lure jobs to their financial capitals.
HSBC, UBS and Morgan Stanley have
decided to move about 1,000 staff each from London in the next
two years, sources familiar with their plans have told Reuters.
Goldman Sachs said last month it would begin moving
hundreds of people as part of its contingency plans.
Prime Minister Theresa May mentioned the importance of
reaching a trade deal with the EU that includes financial
services as a "crucial sector" when she triggered the two-year
process of Britain's exit from the EU last week.
But many bankers have said they are not convinced the
government will prioritise their industry, with May making
controls on immigration a top aim.
Carney said he expected financial services to be part of a
"bigger deal" on trade between Britain and the EU.
He warned of the potential hit to the economy in Europe from
a hard Brexit for banking, saying it would be tough for other EU
countries to match the scale and expertise of Britain. "That's
very difficult to replicate," he said.
To reduce the risk of disruption, the Britain and the EU
should take "the high road" of mutually recognising their
financial rules, allowing companies to operate smoothly across
the English Channel as they have done until now.
"The EU and UK are therefore ideally positioned to create an
effective system of deference to each other's comparable
regulatory outcomes, supported by commitments to common minimum
standards and open supervisory co-operation," he said.
Major global trade deals to date have largely excluded
financial services due to their complexity, however.
Recognition of financial rules has not been tried before on
the scale envisaged by Carney, which could make negotiations
tricky and protracted. The EU may also be reluctant to forgo the
jurisdiction of the bloc's top court in policing rule breaches.
Sean Tuffy, head of strategy for Europe at private bank
Brown Brothers Harriman, said Brussels was unlikely to offer
Britain more than sector-specific deals on mutual recognition,
such as in asset management.
"Barring a huge shift in the UK's negotiating position, it
strikes me as very unlikely that we're going to see a broad
mutual recognition deal for financial services," he said.
Carney said the system could be bolstered by third-party
peer reviews and a new independent dispute resolution mechanism,
adding that this could be a template for the wider world.
He also said he would push to ensure some clearing of
euro-denominated transactions remains in London after Brexit.
TRUMP REFORMS AFFECT U.S., NOT WORLD -CARNEY
Against a backdrop of global concern that U.S. President
Donald Trump may undo some of the reforms implemented since the
financial crisis, Carney said the global financial system was at
a "fork in the road".
Governments had to choose between maintaining high standards
of regulation and respecting each others' rules, or looking
inward with big costs to global trade, he said.
Trump has said that banking rules are holding back U.S.
lending, and has ordered a review of regulation, raising
concerns that the relatively unified global approach to
financial regulation will splinter.
Carney said the United States under Trump seemed focused on
rules unique to the country, rather than a radical overhaul
which would have global implications.
"I'd be very wary of interpreting anything that the U.S.
administration does as a rollback of regulation, of a turning
inwards, of a fragmentation," Carney said.
(Editing by William Schomberg and Catherine Evans)