European Central Bank: Banks and Brexit – the clock is ticking (Speech by Daniele Nouy)
Speech by Danièle Nouy, Chair of the Supervisory Board of the ECB, at a technical workshop on Brexit organised by the ECB, Frankfurt am Main, 30 June 2017.
Welcome to today’s workshop on Brexit. I am happy to see so many bankers here – it shows that you take the issue seriously.
A year has passed since the United Kingdom decided to leave the European Union, and we are still in the dark about what the world will look like after Brexit. But there’s no doubt that Brexit will have a major impact on the UK and the EU. And it will have a major impact on banks; that’s clear as well.
Even though we cannot see the shape of things to come, we still have to make plans. Planning ahead is key – not only for us as supervisors, but also for you as bankers.
This is our second workshop. And while the first one was aimed at banks that operate from the UK into the euro area, this one is for banks operating from the euro area into the UK.
Brexit will affect your banks, ladies and gentlemen. It will affect you if you operate in the UK through a subsidiary; it will affect you if you operate in the UK through a branch; and it will affect you if you operate in the UK without a physical presence.
We would like to have a better understanding of how you are going to assess this impact. And we would like to have an exchange of views on what planning ahead means.
Some of you have told us that it is too early to plan for Brexit. The EU and the UK have only just started negotiating and the nature of the post-Brexit relationship is very unclear.
To be frank, we don’t think it makes sense to adopt a wait-and-see attitude. We will only have some clarity on the impact of Brexit at a late stage in the negotiations; and then it could be too late for you to implement changes that might have to be far-reaching. And you should not count on transition periods that have not yet been agreed.
We urge you to prepare in time and to take steps now. To help you with this, we want to discuss the changes Brexit might bring in terms of regulation and supervision. We see two drivers of change that might be relevant for you.
The first is the Brexit negotiations themselves. In the case of a « hard Brexit », the UK would become a « third country » from the viewpoint of the EU. Banks might well lose some of the rights they enjoy today.
And here I am thinking of the EU passport. Euro area banks operating in the UK might then need a new licence from the British regulator, the Prudential Regulation Authority (PRA), to continue their activities. And obtaining such a licence will take time. Remember that you will most likely not be the only bank seeking a licence; your competitors will be doing so as well, at the same time. The queue might be long.
Against that backdrop, your plans need to take into account that it is sometimes better to act amid uncertainty than to sit back and wait for certainty. Let me give you an example: you might not yet know whether you would be required to convert your UK branch into a subsidiary. But if you were asked to do so, you would need time to prepare the application. And the UK regulators would need time to review your application. So if you calculate backwards from the time of the UK’s departure, you realise that you will need to start the process soon, even if you don’t really know what the PRA requires.
Moreover, a new licence might entail new requirements. For example, you might become subject to solo capital requirements if you are asked to become a subsidiary. Or you might need a new regulatory approval for your internal models.
All in all, it might become more difficult for euro area banks to access the UK market. So any bank will assess the costs of continuing to operate in the UK in a potentially new regulatory environment. The UK will remain an important market for European banks. However, for some banks it might become too costly to operate in the UK post-Brexit, and they might consider relocating their activities. But whichever option a bank chooses, it needs a plan and it needs to act. It needs to decide on where to relocate; it needs to discuss its plans with the supervisor; and it needs to ensure that it will be able to continue serving its UK customers after Brexit.
But there are other issues at stake in the Brexit negotiations that will affect banks. These include equivalence, operational resilience and access to financial market infrastructures. Banks need to understand and mitigate the risks that these issues entail.
The second driver of change is the EU’s position on incoming banks. It’s an important issue for European banking supervision. We have our standards and they apply to all banks that want to operate in the euro area – no matter whether they come from the UK or any other country. As always, we aim for a level playing field – and we will not enter any race to the bottom.
We will cover more specific examples later today, but I wanted to raise the issue of booking models in this context. Our focus on the topic was triggered by Brexit but, in fact, it goes much further than that. The policy we choose with regard to booking models is likely to affect euro area banks’ activities in the UK and elsewhere.
Because this issue is relevant on a global scale, we need some time to develop our position. We want to get it right. Still, we are aware that you would like us to clearly articulate our policy stance sooner rather than later.
For the time being, it is safe to assume two things.
-First, we will not accept shell companies in the euro area. In our first workshop we told the incoming banks that if they want to operate in the euro area they must be « real » banks. For us, this rules out permanently booking exposures back-to-back with another entity outside the euro area. We will require adequate local risk management.
-Second, this « no shells » principle will most likely be applied to you as well when you operate outside the euro area.
But there will be more changes to come, and you may be in a better position than we are to anticipate some of them. This is why we want the workshop today to be a free exchange of views not only on channels of impact, but also on the arrangements already put in place by some banks.
As you know, we asked the banks we directly supervise to share their Brexit strategies with us. Having analysed these strategies, I think it is fair to say that most banks are not where they should be. But there are some banks that have developed specific plans, set out clear timelines and discussed them with the PRA. In today’s workshop, we will give you a high-level overview of the nature of these plans and highlight best practices.
To sum up, being ready for Brexit means having a plan now. As the negotiations have barely started, actual Brexit might seem a distant prospect, but it is not. The clock is ticking. So we urge you to act now and make plans in order to thrive in a post-Brexit world.
Our workshop today gives us all an opportunity to exchange views and share experiences. It will help us supervisors understand how you are approaching Brexit and it will help you understand what we supervisors expect from you.
So, many thanks to all those who made this workshop possible. I wish you all an interesting afternoon and some fruitful discussions.
Thank you for your attention!