Banks’ plans for operating in the EU after Brexit are not yet good enough, the European Central Bank (ECB) warned today.
International banks currently using London as their base for operations are likely to have to establish a new subsidiary in the Eurozone to continue to take advantage of passporting, which allows them to service clients throughout the EU under a single licence.
In a newsletter on banking supervision published today, the ECB warned against “empty shells or letter box banks”.
“Some elements in a number of banks’ plans do not fully meet the ECB’s expectations and requirements of banks operating in the euro area."
The newsletter added: “Banks do not only need to be well capitalised and have sufficient liquidity and funding. They also need to have substance locally.”
Local risk management needs to be “in place from day one” after Brexit, regardless of what transitional arrangement is reached.
Sabine Lautenschlaeger, a member of the ECB’s executive board and vice-chair of the Single Supervisory Mechanism, has previously warned banks not to use shell companies in an attempt to get around moving significant operations within the EU.
The ECB today said that some of the Brexit plans submitted by European banks “lean towards” the shell company structure, with important management functions being sourced from outside the EU.
Europe's banking supervisor also explicitly warned against using back-to-back trades to move risks transacted in the EU to London, which it fears could leave the banks it supervises out of its control in a repeat of the global financial crisis.
The ECB said: “Many banks have indicated their wish to transfer all market risk to a third-country group entity. In practice, this would mean that the banks in question were fully reliant on the third-country entities.”
The ability to maintain “local capability” during a crisis is a “key reason” why back-to-back transactions are not acceptable, the ECB said.
Post-Brexit, the European regulator has insisted that international lenders will have to base a significant chunk of their management capability within the borders of the EU. Today it warned banks against “dual-hatting”, in which management carries out functions in two different parts of a group.
The ECB is particularly concerned about the prospect of management carrying out most of their work outside the EU.