The European Central Bank (ECB) has said London banks will be able to take advantage of a generous transition period after Brexit – provided they move a big chunk of operations within the EU’s borders.
Sabine Lautenschlaeger, an influential member of the governing council of the ECB, said the banking supervisor “will not accept empty shell companies,” in a speech at the Association for Financial Markets in Europe.
But if banks move enough operations to the EU they will not have to wait for the ECB to do its own regulatory checks before starting to trade.
Some banks use their own complex models to calculate their exposure to credit and market risk, and therefore how much capital regulators insist they hold.
Banks in the EU’s Single Market can currently trade throughout the bloc with approval of models from the UK’s Prudential Regulation Authority (PRA), but they will lose that right if there is no deal on passporting arrangements. This would mean banks would have to reapply to the ECB for a banking licence.
Lautenschlaeger said: “There will be a transitional period in which new euro area entities might use internal models that have not yet been approved by the ECB.”
These normally have to pass thorough and time-consuming tests from regulators before a banking licence is issued, but the ECB will allow banks to continue to use their PRA-approved models until it has been able to check them.
Barney Reynolds, a partner and head of the financial regulatory practice at law firm Shearman & Sterling, said the ECB's move was a "negotiating ploy" and a "naked grab for business" which ignores the UK's status as vital source of funding for EU businesses.
He said: "The City is not here because it is a gateway to Europe. It's a global financial centre."
Despite the transitional olive branch to the City, Lautenschlaeger set out a tough stance on regulation, firmly shutting any potential back doors for banks wanting to trade in the EU after Brexit.
Lautenschlaeger said the ECB will “resist any supervisory or regulatory race to the bottom.”
“Any bank that moves to the euro area will have to meet our standards – regardless of whether it comes from the UK or any other place.”
That includes a requirement for “adequate local risk management, sufficient local staff and operational independence,” she said.
Lautenschlaeger also poured cold water on hints from some banks they may explore a “back-to-back” model, in which deals in the UK are mirrored by an EU entity.
She said: “Banks which seek to permanently book all exposures back-to-back with another entity in London should change their plans.
“And so should banks that plan to book all exposures with a euro area entity while having their risk management somewhere else.”