A former member of Germany’s central bank has warned lenders against “falling prey” to the “false sense of security” around a Brexit transition deal, saying time is running out to prepare for a no-deal scenario.

Andreas Dombret, who served as a Bundesbank board member from 2010-2018, made the comments just days before a key EU summit this week that has left Brexit watchers on tenterhooks over whether a timely exit deal can be struck by negotiators.

“We should make no mistake: an agreement at the EU summit this week – as much as one would wish for one – is anything but a sure thing, and even the no-deal scenario remains possible in light of the fundamental differences between the negotiation blocs,” Mr Dombret said.

“Although Britain and the EU have agreed in principle on a transition deal lasting from Brexit to the end of 2020, it is part of a broader divorce settlement that has yet to be formally adopted,” he added.

“Financial institutions must not fall prey to a false sense of security that there will be an agreement and that they have sufficient time left to adapt to the new framework.”

Travel Stock – Frankfurt
A number of UK-based banks have set up European entities in EU cities like Frankfurt ahead of Brexit (PA)

Mr Dombret was in London to speak at the launch of zeb’s UK & European Banking Study, which profiles and ranks the top 50 European banks.

Zeb said that political uncertainty comes at a time of “unstable market conditions” for UK and European banks, for which “unsustainable profit taking” and dwindling market share are already putting future profitability at risk.

Bertrand Lavayssiere, zeb’s managing director for the UK, said: “With recent financial stability warnings issued by both the Bank of England and the European Banking Authority over lack of adequate Brexit planning, time is rapidly running out for banks to take action to ensure there is no disruption to business after Brexit.”

However, the Bank of England earlier this month put the ball in the EU’s court over some more complicated financial instruments, calling for “timely action” from the bloc in order to protect against disruption to derivatives, insurance contracts and the transfer of personal data.

While the Bank said there has been “considerable progress in the UK” to address those risks, there is only limited progress in the EU.

It was the latest warning shot from the Bank after it said in June that the EU needed to do more to prevent Brexit causing havoc in markets.

The UK is passing legislation through Parliament to allow EU-based providers of insurance policies and centrally cleared derivatives to continue to service their UK customers.

But the EU has yet to take similar action.

The UK is now expecting to lose around 5,000 City jobs by Brexit Day, according to Treasury Minister John Glen.

He added earlier this month that “uncertainty” was taking its toll on the sector, which risks firms quitting the City and could hit the Government’s £72.1 billion in annual tax revenues from the financial services industry.