Since Britain left the European Union in 2020, its financial services industry has had reduced access to the bloc, but many ties remain. Investment funds operating from London are often domiciled in Ireland or Luxembourg, while London-based clearing services serve customers across the EU.
However, the EU has declined to recognise most British financial regulation as being of the same standard as its own, despite very limited changes in rules since Brexit and in contrast to its approach to other major advanced economies.
Bailey said it was in Britain and other EU countries' mutual interest to maintain strong cross-border regulatory relationships, rather than for EU countries to seek to limit London's role as an international financial centre.
The BoE has previously argued that EU companies benefit from a deep financial services market in London, and that efforts to restrict it are more likely to drive activity to New York than to other European capitals.
"It's a two-way street. The dependencies go many ways, and thus the incentives to coordinate and cooperate are much larger. In this world, fragmentation would be positively dangerous," told a conference hosted by the Central Bank of Ireland.
Bailey thanked Irish regulators for their help last year when a slump in British government bond prices caused by then-Prime Minister Liz Truss' fiscal plans threatened the collapse of liability-driven investment funds used by pension companies.
Bailey said both Britain and Ireland - where many LDI funds are domiciled - had agreed stronger resilience standards for these funds, as well as on the need to implement global guidelines for regulating money market funds.
Upgrading standards of risk management for open-ended investment funds was another area of agreement, Bailey said.
Funds listed in Ireland and Luxembourg, however, comply with rules written by the European Union, and the more root-and-branch changes the BoE would like to see probably need Brussels to make revisions.
Bailey said that countries should seek similar financial stability outcomes based on standards jointly agreed through bodies like the Financial Stability Board, rather than expect identical rules which do not account for national differences.
(Reporting by Conor Humphries and Padraic Halpin, writing by David Milliken; Editing by William Schomberg and Emelia Sithole-Matarise)
