Carney and the "no deal" Brexit threat

The Governor of the Bank of England has always been clear about two things.

That the present Brexit process has had negative effects on the broader economy and on people's incomes.

And that a Brexit deal where there is no formal agreement between Britain and the European Union would make those effects worse.

As Mark Carney said to me in an interview earlier this week to mark the 10th anniversary of the financial crisis, Brexit is one of the Big Four risks the Bank is facing.

A debt crisis in China, problematically high household debt in the UK and a catastrophic cyber-attack taking out a whole bank are the others.

"There are risks around Brexit for the financial sector," he told me.

"And here's something that's changed with the system from 10 years ago - we are absolutely upfront about those risks, our view of those risks.

"We have stress tested our banks against those risks to make sure they have enough of a safety net, both in terms of their own funds plus liquid funds, in case we had a no deal Brexit."

The key phrase is "stress tested".

The Bank's Financial Policy Committee regularly sets "doomsday scenarios" to test the banking system's robustness in the face of a significant shock.

The last stress test in November involved a scenario where house prices fell by 33%, interest rates rose to 4% and unemployment doubled.

It became known as the "no deal test" and is remarkably close to the headlines we are seeing this morning.

It appears that the Governor wasn't providing the Cabinet with a forecast of what the Bank believes would happen in the event of a no deal Brexit.

He was briefing the Cabinet on what preparations the Bank was making if that does happen, including last November's stress test.

It was not a forecast.

It was an apocalyptic test where the Bank deliberately sets the parameters beyond what might reasonably be expected to occur.

The major banks all passed the test, giving reassurance that the financial system can cope with whatever happens next year.

The Governor believes that a "no deal" scenario would be bad for the economy.

But not as bad as the headlines today which are based on a doomsday scenario that is not actually forecast to happen.

There is another point that is often lost in the loudness of the negative headlines.

If there is a "good deal" with the EU, Mr Carney believes there could be a significant boost to the economy as pent-up demand held back by the present uncertainty is released.

Investment could rise markedly, he has argued.

Those are the options as he sees them, and it is up to the politicians on both sides of the negotiation to come to a decision on which route they take.