18 May 2017. By Hugo Coelho.
Large European lenders are walking a tightrope after the European Central Bank asked for an advance view of Brexit contingency plans that the UK central bank asked them to prepare, MLex has learned.
The ECB has written to banks asking them to reveal measures they propose for a worst-case scenario, where the UK crashes out of the single market and lenders need to restructure their operations to continue doing business in London.
EU authorities could force banks to make amendments to the plans before the BOE receives them, it is understood.
"Banks are struggling to define what hard Brexit looks like and how they will respond to it," said one person who asked not to be identified. "The ECB request only increased the challenge of the process."
Regulators could have conflicting interests and demands, he added.
In April, the Bank of England's supervisory arm wrote to banks doing cross-border business, such as Deutsche Bank and Société Générale, and gave them until July 14 to submit contingency plans for their post-Brexit operations in the UK.
Prudential Regulation Authority chief executive Sam Woods said some banks were lagging behind in their preparations, or weren't taking into account the most adverse scenarios.
This includes a scenario where the EU and Britain fail to reach an agreement on easing access to each other's markets, and fall back on restrictive global trading rules.
Many large European lenders today rely on "passporting" rights to conduct business in London.
To continue operating after Brexit, they might need to seek authorization from the PRA to set up a foreign branch or a subsidiary in UK, Woods said. This could take months to complete.
EU regulators are seeking to influence the process from the early stage.
The ECB, which is tasked with supervising the largest banks in the eurozone — the 19 countries that share the euro — is understood to have written confidentially to banks under its oversight, asking to see a draft of the plan being put together for the BOE.
The letters were sent the week after the BOE made its request, and were tailored to each bank to reflect differences in business models.
Lenders have until the end of June to respond — enough time for the ECB to give feedback and to ask for changes before the BOE deadline.
Some of the banks must answer specific questions before the end of May, MLex understands.
Operating through a subsidiary would mean that EU banks' operations in the UK would be supervised directly by the PRA, and that lenders would have to hold part of their capital and higher liquidity buffers locally.
This could shrink the capital and liquidity available to back operations elsewhere, as well as banks' capacity to lend to the economy.
An ECB spokesman didn't confirm the request, but said the central bank was "in close contact" with lenders about their plans for Brexit.
The Bank of England declined to comment.