“Sanity” will not be the main principle of negotiations over Brexit, according to an influential central banker, as he renewed efforts to woo British-based banks to move to Europe.
Andreas Dombret, an executive board member at the German Bundesbank, said political considerations will override economic concerns in a speech delivered in London at the consultancy Zeb.
“We should not count on economic sanity being the main guiding principle,” he said. “The fact that this scenario [of no deal being reached] would most probably hurt economic activity considerably on both sides of the Channel will not necessarily prevent it from happening.”
Dombret has previously said the UK will lose its status as the “gateway to Europe”, and he repeated his opinion banks will move operations from Britain in an effort to safeguard market access.
The Bundesbank, which regulates banks operating in Germany as well as being a central member of the European Central Bank, has formalised its efforts to entice banks to the mainland, launching a website this week explicitly aimed at making it easier for banks to move to Germany.
It comes in a week the Bank of England has warned against "currency nationalism" after Brexit, and pledged to work with the EU once the UK leaves.
While Dombret said he expected London to remain an important global financial centre, he added: “I also expect a number of UK-based market participants to move at least some business units in order to hedge against all possible outcomes of the negotiations.”
He said multiple financial institutions have already approached German regulators to discuss moving operations if the UK leaves the EU’s Single Market.
British Prime Minister Theresa May last month confirmed the UK will withdraw from the Single Market, membership of which currently allows London-based banks to trade across the entire EU without seeking a regulatory licence from operators in each country.
Banks are likely to lose rights to these passporting rights, although there is a high likelihood they will be able to trade under equivalence arrangements, given the UK and EU currently have harmonised regulatory regimes.
However, Dombret dismissed equivalence as a possibility, saying banks will not rely on it in the long-term.
He said: “I am rather sceptical about whether equivalence decisions – may they be likely or not – offer a sound footing for long-term location decisions of banks.”
In a further hard line towards British banks, Dombret said the central bank will not look kindly on efforts to set up regulatory back doors.
Financial firms will have to carry out the bulk of their management operations within Europe’s single surpervisory mechanism (SSM), he said, while “letterbox” operations or shell companies would not be sufficient for regulators.