Monday 23 July 2018

ECB warns banks they must be 'proactive' and step up preparations for hard Brexit

The headquarters of the European Central Bank (ECB) (R) is seen next to the famous skyline in Frankfurt. Photo: Reuters
The headquarters of the European Central Bank (ECB) (R) is seen next to the famous skyline in Frankfurt. Photo: Reuters

Gretchen Friemann

The European Central Bank yesterday urged UK and Euro area banks to accelerate preparations for a hard Brexit, warning the "clock is ticking" on the divorce negotiations.

In a newsletter released by the regulator, Sabine Lautenschläger, an ECB executive board member and vice-chairwoman of the single supervisory mechanism (SSM), reminded the sector that "no one knows how Brexit will play out, and that's why all affected banks should prepare themselves with a hard Brexit in mind".

She claimed UK banks looking to relocate operations into the single market area are not "as far advanced as we would like them to be".

"Of the banks that have indicated an interest in relocating operations to the euro area, a number of the larger banks have made progress in their planning. But we have not seen many final decisions yet on how these and other banks want to organise their business."

She also urged euro area banks to be "proactive" with the formal separation negotiations with the UK now under way.

She said it "is very important for us to make sure that those banks we supervise, as well as the ones looking to set up here, do not just close their eyes and wait for whatever might happen".

Yet analysts remain fairly sanguine about the prospects of the Irish banks amid this great uncertainty. Owen Callan of Investec argued AIB and Bank of Ireland, the lender most exposed to Brexit, have adopted a suitably cautious approach, including reining back lending into the UK.

He claimed this reluctance to chase volume is partly due to the increased margin pressure in the British market.

Francesca McDonagh, a senior banker in HSBC, will take over the reins from Bank of Ireland's long-serving CEO, Richie Boucher, in October.

At the lender's most recent results announcement, Liam McLoughlin, head of retail, stressed the bank could withstand the Brexit headwinds.

On a call to analysts he said that while "Brexit has clearly generated some risks and uncertainty ... we're confident in the robustness and flexibility of our diversified business model".

Ms Lautenschläger's warning to the banks comes as sterling hit a seven-year low yesterday in the wake of worse than expected UK inflation figures.

While the currency rebounded after robust unemployment figures, the currency depreciation against the euro has fuelled fears about the economic impact on Ireland.

A recent Citi report also highlighted that the recovery of the Irish banks may slow as Irish exporters in the agri food sector come under mounting pressure.

But Mr Callan stressed the banks are limited in how they can prepare for the UK's exit from the EU since "nobody knows what Brexit will look like".

Ms Lautenschläger stressed banks should update their recovery plans "to reflect the changed environment and group structure."

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