The European Central Bank aims to complete a detailed assessment of how international banks run their business in the EU by early next year, which risks triggering a deadlock with UK regulators over the whereabouts of senior executives and capital.
International banks fear they will face competing demands from eurozone and UK regulators on how they structure their European operations once the ECB completes its so-called ‘office mapping’ exercise – a detailed review of how banks have set up their operations in the EU, including where they locate staff and capital.
The assessment is designed to establish the extent to which banks are using various techniques to shift the risk of EU operations outside the bloc, particularly in the UK, where many had based their European operations before Brexit.
One of these techniques is to use back-to-back models, which allow banks to clear EU transactions with their London entities and effectively manage risk originating from the UK. Another is office splitting, where banks jointly manage EU customers or assets from offices located both on the continent and in the UK.
The assessment has already sparked high-level discussions between euro-zone and UK supervisors after the Bank of England expressed concern that the ECB appeared to be trying to ‘gut’ trading operations. some large UK-based international banks, according to a person briefed on the matter.
The ECB reassured the BoE that the review is no different from similar assessments conducted by other major central banks, and that it is not asking banks to move more staff or capital out of the Kingdom “Not that they haven’t already accepted it,” the person said.
A second person familiar with the conversations said the UK regulator did not expect to be “blinded” by new requests to move people and capital out of London.
The subject has been a thorny one since the UK left the EU without a trade deal for the financial services sector in January 2020. Most international banks are in favor of keeping their banking operations in London as much as possible. investment and capital markets to maximize their efficiency.
In March 2020, the ECB said banks had agreed to move more than â¬ 1.2 billion in assets from the UK to their eurozone subsidiaries, quadrupling their size as measured by assets compared to late 2017.
Despite this, the ECB has since stepped up calls on banks to add hundreds of additional staff and billions of additional capital to their post-Brexit operations in continental Europe.
This led to tensions with the Prudential Regulation Authority and the Financial Conduct Authority. A British regulator told the FT that if there was “really strong technical cooperation” with his counterparts in Frankfurt “politics is difficult”.
“Where we must be vigilant is to guarantee the requirements for the movement of activities or resources that are [presented as] motivated by regulatory goals are not covered for things that are motivated by industrial goals, âsaid the person.
If that happens, UK regulators “will have a conversation with the company and say ‘no, we don’t consider this to be warranted,'” the person added. âWe already had to do it. . . we have to be very careful that they do not do things that, in our view, undermine the integrity of the market.
Speaking at a recent event, PRA chief Sam Woods said he was “relatively optimistic” about the level of movement so far, but that it would be “unacceptable” if he did. ‘intensified to a point where London was in danger of being emptied.
The ECB has spent several months examining how banks with large operations in the EU handle clients and assets based in the bloc. He plans to share the findings of his exercise with banks and supervisors, including the BoE, over the next three months. He has not yet decided whether the findings will be made public.
Some banks expect the exercise to result in a significant increase in their presence in the EU.
The position of the Frankfurt-based institution was underlined by Edouard Fernandez-Bollo, member of the ECB’s supervisory board, last month when he said that “empty shell institutions are not acceptable in the euro area “. He added: âActivities and services involving EU clients should be carried out primarily within the EU. “
The ECB declined to comment on tensions around the exercise, as did the PRA.