Europe’s top financial supervisor is fed up with waiting for big banks to prepare for Brexit.
This is the message European Central Bank officials have given to banking executives this summer, while asking them for “action plans” to make their EU offshoots “operationally self-standing in key areas” by the end of this year when the Brexit transition period ends.
But the move by the ECB to turn the screw on lenders over their Brexit plans has produced loud complaints. Some bankers privately suspect this is a politically motivated way of putting pressure on the UK as trade talks with the EU enter a crucial stage.
While the largest banks have been working on these issues since the UK voted to leave the EU in June 2016, the ECB is still not convinced they have shifted enough people, assets and resources from London to their eurozone offshoots to make them ready for the post-Brexit world.
“Some banks have substantially reached their target operating model already or are well on track towards that target,” the ECB said in a statement to the FT.
But it added: “There are other banks that still need to make progress, both in terms of relocating assets and staff. Our joint supervisory teams have engaged with these banks to make sure there is a shared understanding of the path towards the target operating model.”
The central bank also stressed “this is not about moving assets and staff alone. It is also about aiming to be structurally profitable, being operationally self-standing in key areas and most importantly not excessively reliant on back-to-back booking to the parent”.
The ECB is now responsible for supervising the 25 new or restructured banking operations that have applied for fresh authorisations because of Brexit, as well as 10 others that have substantially increased the size of their eurozone-based operations.
Among these, the eurozone operations of four banks — Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS — grew big enough to fall under the direct supervision of the ECB last year. Others are supervised by both national regulators and the ECB.
A key question for bankers has been whether their EU offshoots will be able to operate on a standalone basis after Brexit. The answer for many is that they still rely heavily on their parent companies for critical functions such as risk-management or IT services.
This is because for many years, global banks centralised their European corporate and investment banking activities in London. Almost half of all debt and equity issuance for non-financial institutions in the eurozone from 2012 to 2018 was done from the UK. Financial services exports to the EU were worth £26.1bn in 2018, a fifth of total UK services exports.
The tussle between the ECB and the banks will be vital in determining how much of this business leaves the City of London. Officials at the ECB say banks have outlined plans to move more than €1.2tn of assets from the UK to their eurozone offshoots, quadrupling their size since the end of 2017.
“The ECB’s expectation is very clear: all activities related to European products or European customers should, as a general principle, be managed and controlled from entities located in the EU,” Yves Mersch, an ECB executive director and vice-chairman of its supervisory board, said in a blog over the summer.
Supervisors at the ECB worry that some banks are still clinging to uncertain scenarios that they hope will let them keep more operations in the UK.
These include counting on Brussels to grant the UK “equivalence” — a status that would open access to the bloc’s financial markets in some areas — but discussions have been bogged down in recriminations.
Another involves a controversial technique known as “back-to-back” operations that would allow institutions to transfer the risk of EU deals across borders by carrying out a parallel transaction in the UK.
It would be too risky for banks to rely heavily on these options, according to Rachel Kent, head of financial services regulation at the law firm Hogan Lovells. “Equivalence has become politicised, so I don’t think banks are holding out for that,” she said.
In the immediate aftermath of the Brexit vote, there were forecasts that London would lose tens of thousands of jobs. The lobby group Frankfurt Main Finance predicted the German financial capital would attract 10,000 bankers, but now it says only 1,500 jobs have been added with a further 2,000 expected following the transition period.
What is now more worrying for the banks is if the ECB gets its way, they will end up with overlapping European operations — in London and in the eurozone — at a time when the fallout from the coronavirus pandemic already threatens to make a big dent in their profits. If that happens, expect more cost-cutting on both sides of the English Channel.