Bank of England governor Mark Carney on Friday gave financial firms working across European borders until July 14 to come up with a plan for coping with Brexit, in case Britain fail and European Union negotiators fail to reach a deal on mutual recognition of banking rules and standards.
The pound fell against the greenback after the comments, falling 0.39% to $1.2419 at 11:12 BST.
In a major speech on the impact of Britain's departure from the EU, Canadian-born Carney said the U.K. and Europe are "ideally positioned" to strike a deal on financial regulation, because they currently share "exactly the same" regulatory framework.
"The EU and U.K. are therefore ideally positioned to create an effective system of deference to each other's comparable regulatory outcomes, supported by commitments to common minimum standards and open supervisory co-operation," he told an audience at Thomson Reuters headquarters in London's Canary Wharf.
But he warned that the outcome is still uncertain. So banks from the U.S. and other non-European institutions that currently use London as a base, must, like their British counterparts, be prepared to lose the "passporting rights" that allows them to operate in the EU.
And regulators too must be prepared.
"Given our responsibilities to promote financial stability, the Bank - like its counterparts on the continent - must plan, purely as a precaution, for all eventualities," he said.
Some major international banks have already begun taking precautions, with the likes of Morgan Stanley (MS - Get Report) , UBS (UBS - Get Report) and Britain's HSBC (HSBC) all preparing to move staff out of London to other European financial centers.
But the Bank of England is concerned that not all cross-border financial firms are as well prepared.
The Bank of England has said the U.K. financial sector accounts for almost a quarter of all EU financial services income and 40% of EU financial services exports. Eighty of the of the 358 banks operating in the U.K. are headquartered elsewhere in Europe.
Carney also warned that global financial system is at a "fork in the road", with the outcome of Brexit negotiations likely to influence how banks are regulated.
But he said taking "the low road", where countries turn inwards and do not work with other nations' financial regulators, would ultimately lead to fewer jobs, lower growth and higher domestic risks.
"How Brexit negotiations conclude will be a litmus test for responsible financial globalization," he said.