Wednesday 22 November 2017

Fast track 'back' to EU for banks leaving London after Brexit

Donal O'Donovan

Donal O'Donovan

The ECB could fast track authorisation of banks leaving the UK because of Brexit, a top official confirmed yesterday.

The ECB may be willing temporarily to forego its requirement to pre-approve the financial models banks use to determine risks, provided that these models have already been approved in Britain, ECB board member Sabine Lautenschlaeger told bank executives, confirming a Reuters exclusive.

An agreed fast-track regime would apply across all European banking markets and so limit the risk of firms exploiting so-called "regulatory arbitrage" or differences in standards between countries, something that Financial Services Minister Eoghan Murphy complained about last week.

The fast track plan would see supervisors spare lenders having to undergo a lengthy initial test of their risk models, Lautenschlaeger said on Wednesday.

For investment and wholesale banks, risk models can be highly complicated so reviewing those internal controls and models can take months.

The ECB's temporary waiver could expedite relocation, potentially reshaping Europe's financial landscape with places like Dublin, Frankfurt, Paris, and Luxembourg grabbing business from London.

"With a view to internal models, we would aim to be accommodating regarding the timing," Lautenschlaeger, a bank supervisor, said. "There will be a transitional period in which new euro area entities might use internal models that have not yet been approved by the ECB."

The condition for such an exemption is that models must have already been approved by the UK's Prudential Regulation Authority and that the banks must have already applied for internal model approval in the euro area, Lautenschlaeger said.

"The transitional period will cease as soon as we have approved or rejected the bank's model application," she added.

Britain will trigger divorce proceedings with the European Union on March 29 and UK-based banks are almost certainly lose their rights to access the EU's single market from London, now the bloc's financial hub.

A handful of firms, like Goldman Sachs and insurer AIG, have already announced plans to move some operations to Europe but most are still holding out, contemplating their next step as it may take years before clarity on the new regulatory framework is delivered.

Despite the expedited entry, banks should not expect easier supervision, Lautenschlaeger said, warning that Europe will not lure banks by giving up its standards.

"We will not accept empty shell companies," she said. "All entities in the euro area must have adequate local risk management, sufficient local staff and operational independence."

Meanwhile, Dublin is the best alternative for London-based bankers forced to move after Brexit, according to an index of 15 cities compiled by a relocation company.

Ireland tied for the highest top income tax rate, at 52pc, but benefited from being English-speaking and the "low" cost of renting a flat in Dublin - cheaper than Paris, Frankfurt or Luxembourg, Movinga said on its website.

Amsterdam is the next-best destination for Brexit exiles, while Frankfurt languished in sixth place and Paris in ninth, below Valletta in Malta and Brussels, the index showed.

Additional reporting Reuters and Bloomberg

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