By Kylie MacLellan
LONDON (Reuters) - If Britain does not agree a transitional arrangement with the European Union for the country's finance industry, it will be damaging for the economy and the financial services sector, the Chairman of Royal Bank of Scotland <RBS.L> said on Sunday.
The country's finance sector has been lobbying for an agreement designed to cover the gap between Britain completing its exit talks with the EU and agreeing a new trade deal with the bloc to prevent a "cliff edge" effect causing disruption.
Britain suddenly breaking off from the EU would be "destabilizing" for European financial markets, Howard Davies told ITV.
"It is damaging if we don’t get a transitional deal because I think you will then see banks and financial institutions making decisions on the basis of uncertainty," he said.
"They are currently making contingency plans and once you have got a contingency plan there is a risk you might implement it one day and therefore I think that it is quite urgent."
Davies said he thought it was possible Britain would get a transitional deal because the EU's other 27 countries realized their companies could also be damaged by being unable to raise finance in London in the event of a hard break with the EU.
"I think there is the basis of a compromise," he said.
Prime Minister Theresa May has given little away about her plans for Britain's future relationship with the EU. Davies said he understood that while May did not want to reveal her negotiating position, she needed to say more on the transition.
He said RBS, which is more than 70 percent state owned, would make decisions about whether to shift resources out of Britain when it knew whether it would be able to continue using the EU's passporting system, which allows banks to sell across the region without setting up shop in each country.
RBS is waiting for what is likely to be the biggest regulatory penalty in its history for its role in mis-selling U.S. mortgage bonds.
Davies said that the outstanding settlement with the U.S. Department of Justice was standing in the way of re-privatizing a significant stake in the bank as it made it difficult to value the shares.
Asked if the Donald Trump's U.S. presidential election win would impact the timetable of any settlement he said it was hard to know yet.
"The key thing we’ll have to see is whether Deutsche Bank <DBKGn.DE>, who are ahead of us in the queue, reach a settlement. If so, then an earlier settlement for RBS is possible," he said.
(Reporting by Kylie MacLellan; Editing by Elaine Hardcastle and Jane Merriman)