Treasury Says Brexit a Danger to U.S. Financial Stability

Britain's vote last month to exit the European Union has raised the danger level for U.S. financial stability, according to U.S. Treasury Department report released Monday.

The U.S. Office of Financial Research said risks to the American economy remained in the "medium" range but had been exacerbated by shock victory of the "leave" campaign in Britain's June 23 referendum on EU membership.

"Because the UK economy and especially the UK financial system are highly connected with the rest of Europe and the United States, severe adverse outcomes in the UK could pose a risk to US financial stability," the report said.

The vote has sent British asset prices and economic growth forecasts tumbling. It also helped persuade the US Federal Reserve not to raise interest rates in its last policy meeting.

The Office of Financial Stability, a part of the US Treasury, was created as part of reforms enacted in 2010 in response to the global financial crisis.

Some risks that predated the British referendum remain, such as the dangers of excessive borrowing and risk-taking fostered by persistently low interest rates, the report said.

However, London's withdrawal from the EU could lead to recession in the British or regional economy, hurting U.S. trade, or cause volatility in currency markets.

"A loss of confidence can be self-perpetuating, and indirect linkages can be invisible until revealed by stress," the report said.