Brexit is a 'litmus test' for the world, says Mark Carney

The world economy is sitting at a "fork in the road", according to the Governor of the Bank of England, who says Brexit could be a "litmus test" for the world.

Mark Carney used a speech in the City of London (LSE: CIN.L - news) to outline his vision of how Britain's financial system could react to the country's withdrawal from the European Union.

But he also offered a warning that countries should not "reverse the progress made" since the financial crisis "and undermine the objective of strong, stable and balanced growth".

Mr Carney said that the UK and the rest of the EU had common interests and were "ideally positioned" to strike a deal over financial services, and he outlined a vision of how that structure could work in years to come.

At the moment, financial companies based in Britain can "passport" their services across Europe.

That right will go after Brexit, but Mr Carney said the two sides could create a system of "effective deference", supported by "independent peer review" and "an independent dispute resolution mechanism".

Behind the technical jargon is a very important concept - that a new structure could be created that would allow the UK's financial industry to continue working with Europe, overseeing regulation and resolving disputes.

I understand this is an idea that has widespread support within the Government as well as the Bank of England.

It may not be as well received in some European countries, particularly those who are hoping to benefit from Brexit.

A number of international companies, including HSBC and UBS (LSE: 0QNR.L - news) , have already said that they will set up new subsidiaries in Europe in order to ensure they can continue doing business across the continent after Brexit.

Last week, Lloyd's of London confirmed it would be setting up a new office in Brussels.

But Mr Carney suggested there was a bigger question at stake - the stability of the entire global banking system.

He outlined two options - the "high road and the low road". The former, he said , builds on improved global standards and co-operation in the global financial system. Mr Carney said this would lead to more jobs, higher growth and greater resilience.

His vision of the "low road", though, was one of reduced trust, fragmentation and weaker growth.

Put simply, if one country doesn't trust in the standards of another, it will cut doing business with it, and put up greater barriers.

"It is all too easy to give into protectionism, but the road less taken is often the most rewarding," said Mr Carney.

"There should be no bonfire of financial regulation. But we will be dynamic - learning by doing and making adjustments as necessary."

His vision of a new structure of financial compliance was not, he said, restricted to Europe, but could be used as a template around the world "to the immense benefit of the global economy".

Mr Carney did say that companies should make contingency plans in case no Brexit deal is struck, and he revealed that the Bank is writing to all firms in the financial sector to check what plans they had made to deal with Brexit.

"We will," he said, "work tirelessly for a responsible and open financial system that benefits us all."