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Nov. 24 (Bloomberg) -- U.K. banks should have contingency plans for “unlikely but not un-severe scenarios,” including the exit of euro-area member states, said Andrew Bailey, head of banking supervision at Britain’s Financial Services Authority.
Supervisors are “talking to the banks about this and they’re doing it,” Bailey told reporters at a retail banking conference in London today. Failure to plan for the exit of a country from the euro currency would constitute “unsound risk management,” Bailey said.
European leaders this month raised the possibility of Greece leaving the euro area after the country’s prime minister at the time, George Papandreou, proposed a referendum on the terms of a European Union financial aid package to help Greece with its sovereign debt crisis.
“The eurozone was designed without an exit mechanism and so working out how this may happen is difficult,” Bailey said.
EU treaties make no provision for a country to exit the currency, and the European Central Bank’s legal department said in December 2009 that an expulsion “would be so challenging, conceptually, legally and practically, that its likelihood is close to zero.”
Bailey also told reporters that he didn’t think U.K. banks would have to raise any additional capital under the European Banking Authority’s plans to shore up lenders’ reserves in the region.
--Editors: Peter Chapman, Fergal O’Brien
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