Wednesday 18 September 2019

British banks shift €1.3trn of assets over to eurozone

European Central Bank (ECB) supervisory chief Andrea Enria. Photo: AFP/Getty Images
European Central Bank (ECB) supervisory chief Andrea Enria. Photo: AFP/Getty Images
Donal O'Donovan

Donal O'Donovan

Around two dozen banks based in the UK will have moved roughly €1.3trn worth of assets to the eurozone by the time it leaves the EU, European Central Bank (ECB) supervisory chief Andrea Enria has told Finnish broadcaster Yle.

"We will have 24 banks, basically, that will move. Seven will be directly under ECB supervision and 17 will be under national supervision where they choose to relocate to," Mr Enria said in an interview published yesterday.

Under the ECB structure, domestic regulators oversee smaller banks while the central bank's Single Supervisory Mechanism oversees major banks, in conjunction with national authorities.

"We have done the best preparation we could. The banks did what we asked them to do, and a contingency plan is in place," Mr Enria said.

Ireland is among the countries to gain from the loss to the City of London, with Barclays, Bank of America Merrill Lynch and Citi in particular shifting very large parts of their balance sheets here ahead of Brexit.

Barclays and Bank of America have between them moved €250bn of assets - typically loans and financial contracts - to Ireland, as well as hundreds of staff. Balance sheet moves mean banks fall under the supervision of euro area regulators, including the Central Bank of Ireland.

The costs of shifting banks' balance sheets can be enormous. Bank of America has estimated the cost of its Brexit preparations at as much as €400m - much of it legal and administrative.

As well as banks, insurers and asset management companies have shifted parts of their operations from the UK to Ireland ahead of Brexit.

Elsewhere, the German financial capital Frankfurt, along with Paris, have secured big bank moves of their own.

Global giants Goldman Sachs, JP Morgan Chase and Morgan Stanley are all shifting parts of their balance sheets to Frankfurt. HSBC is among the banks that are plumping for Paris as a hub for post-Brexit EU access.

Earlier this month, the ECB criticised the level of preparations among banks for Brexit, noting that financial institutions had transferred "significantly fewer activities, critical functions and staff to euro area entities than originally foreseen." The ECB said it sees a risk that, as a result of these delays, banks will not be able to fully implement their target operating models within the timelines agreed with their supervisors.

A hard Brexit in particular would force banks to significantly adjust internal structures, such as the practice of back-branching, which involves servicing clients in the EU from branches in the United Kingdom.

"The ECB expects banks to follow up on agreed commitments, in particular regarding the build-up of local risk management capabilities and governance structures. If plans are only partially implemented, this could have a negative impact on banks' profitability," it said.

The shift is creating a bigger regulatory burden for supervisors themselves.

Central Bank deputy governor Ed Sibley noted earlier this year that the Irish regulator had been forced to prioritise Brexit over other work, in the short term.

The Central Bank of Ireland has processed more than 100 authorisations from financial firms looking to come here as a result of Brexit, mainly smaller-scale operations with in many cases small numbers of staff. But the deluge of applications from firms and executives seeking authorisation has stretched capacity at the regulator.

Meanwhile, Boris Johnson's decision yesterday to suspend the UK parliament ramped up uncertainty for the sector.

The UK government has been working to make sure EU financial regulations are enshrined in domestic law in the event of a no-deal Brexit.

The move on Wednesday to suspend parliament puts this process into limbo, adding extra uncertainty before the October 31 deadline.

Legislation is pending in parliament to give policymakers more time to make changes post-Brexit, but the measure has not yet been enacted.

If the Financial Services (Implementation of Legislation) Bill does not pass during the current parliamentary session - which will end in mid-September under Mr Johnson's plan - law makers will need to push for new legislation in the next session, according to a briefing note from the House of Commons.

There may not be time to do that before November.

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