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The Bank of England is forcing UK banks to hold an extra £6bn in capital to guard against risks beyond that of Brexit, as it called on the UK and the European Union to introduce legislation to avoid a post-Brexit crisis in derivatives and insurance markets.

The BoE said on Tuesday that it is raising a special buffer half a percentage point, to 1 per cent, to lock in capital that banks are currently holding voluntarily. The aim is for lenders to better withstand against “material” macroeconomic risks beyond Brexit, such as global debt levels, asset valuations and misconduct costs. The buffer could raise again next year, the central bank warned.

A disorderly Brexit is unlikely, the BoE forecasts. But Mark Carney, BoE governor, warned in a press conference that a hard Brexit would have an “an effect on households and businesses; there will be some pain associated with that. This is about minimising that, dampening that.”

While the central bank’s annual stress tests of banks, also published on Tuesday, showed that they have enough capital to lend through the equivalent of a disorderly Brexit, the BoE still harbours concerns about the risks a hard Brexit poses to financial stability more generally. In particular, it is worried about the 6m UK policyholders — and 30m European policyholders — who may find their insurance contracts void. Legal uncertainty also hangs over £26trn of outstanding derivatives contracts.

Mr Carney told the press conference a transitional arrangement should be agreed — “the sooner the better”. The BoE would like an implementation period of at least 24 months, he added.

Pushing a four-point action plan, the BoE repeated calls for lawmakers on both sides of the Brexit negotiations to agree a transitional arrangement. Regulators have previously said that an agreement needs to be in place by Christmas otherwise financial companies will start to launch their worst-case contingency plans.

He said the point of the check list was to “catalyse” action and to ensure that secondary legislation can be drafted and approved to deal with the vast amounts of derivatives contracts and insurance policies that are facing legal uncertainty. Both UK and EU legislation would be needed to ensure continuity, he added.

The BoE also warned that UK lawmakers needed to get a legal and regulatory framework in place so that after the so-called Withdrawal Bill, secondary legislation can be swiftly agreed, which deals with much of the detailed financial regulation on which the system depends.

The BoE’s Prudential Regulation Authority will detail before Christmas how it will deal with the wave of authorisations that wholesale banks headquartered in the European Union will need to apply for post-Brexit. It has already said that it expects EU banks with a strong retail presence to subsidiarise in the UK.

The special buffer increased on Tuesday is called the counter-cyclical buffer, which previously stood at 0.5 per cent.The idea of the buffer is to force lenders to put aside more capital during good times to draw down upon in bad. At 1 per cent — which is the level the BoE considers to be the right level in a “standard” risk environment — lenders need to hold around £11.4bn in aggregate. They have until November 2018 to do this.

The BoE said that it will consider before June whether 1 per cent is the right level to keep the buffer.

While Royal Bank of Scotland and Barclays emerged as the weakest lenders during the stress tests, no bank has to raise more capital as a result; a first since the BoE started stress tests in 2014.

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