Banks, don't use regulatory arbitrage to game the system after Brexit warns ECB executive

Jasper Jolly
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Sabine Lautenschlaeger has responsibility for the ECB's banking supervision (Source: Getty)

Different models of access to the EU market for banks after Brexit could prompt banks to try to game the system, according to an influential policymaker at the European Central Bank (ECB).

Sabine Lautenschlaeger, an influential member of the ECB’s executive board, said if regulatory approaches fragment it will lead to banks trying to exploit differences between jurisdictions.

“It is an invitation to banks to engage in regulatory or supervisory arbitrage,” she said at a press conference in Frankfurt.

Read more: It's official: ECB to make it easier for UK banks to move to EU post-Brexit

She added: “That’s why we will keep a close eye on how banking groups structure their euro area entities.”

Banks with operations based in the UK are currently able to trade throughout the EU’s Single Market without gaining a separate banking licence. However, financial services’ future trading relationship with the EU will depend on what deal the government is able to negotiate during the next two years.

Lautenschlaeger, who is the vice-chair of the central bank’s supervisory board, reiterated her warning that the ECB will not tolerate “empty shell companies” used as a regulatory backdoor.

“Any new entity must have adequate local risk management, sufficient local staff and operational independence,” she said.

Read more: Draghi: Brexit has had no significant economic impact

Ahead of negotiations over the trade relationship the ECB has tried to balance Europe’s need for financing from London with its desire to only allow financial services which are deemed to meet European standards.

Last week Lautenschlaeger said the ECB will grant a temporary waiver for banks looking to move operations to the rest of the EU, while the German Bundesbank has set up a website for financial services firms looking to relocate.

Yet she also noted the strong financial links between Europe and the UK would remain, despite the Brexit process bringing “major change.”

She said: “The financial sectors in the UK and the EU will remain closely connected.”

It comes as a risk analysis from the German Finance Ministry warned that a hard Brexit would have "grave economic and systemic consequences" for Europe.

German newspaper Handelsblatt obtained the risk analysis expressing concern that Britain and the EU could fail to reach a deal on future relations, leading to a hard Brexit, where the financial industry would be hit the hardest.

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