UK banks falling behind in Brexit relocation plans, says ECB board member

Writing on the ECB website, Sabine Lautenschläger warned that "the clock is ticking", and that banks of all sizes should be making contingency plans based on a 'hard Brexit' scenario, assuming that the UK loses access to the EU single market.

Lautenschläger, who is vice-chair of the ECB supervisory board and a member of the central bank's executive board, added that there would be no "race to the bottom" in supervisory standards among EU member states as they competed to attract UK banks to set up subsidiaries.

"First, the national supervisors are an inherent part of European banking supervision, so they should have a European perspective," she said. "Second, the ECB is not just responsible for directly supervising the largest banks, but also for ensuring consistent supervision and a level playing field for all banks in the euro area - no matter which member state they operate in."

"Against the backdrop of Brexit we, together with the national supervisors, have developed and agreed upon a number of relevant policy stances. These policy stances clarify how we will treat banks in the context of Brexit without compromising our standards," she said.

Issues that the ECB is concentrating on in the run-up to Brexit include recovery and resolution planning, particularly for those institutions that were planning to move to the euro area; risk allocation; and 'gaps' in the European supervisory framework, which could potentially allow banks to conduct "substantial bank-like activities" through investment firms or third-country branches. The ECB was also planning to intervene at an early stage to prevent UK institutions from setting up 'empty shell' subsidiaries in other member states to give them access to the European market, Lautenschläger said.

"We need to remember that the ECB is fully in charge when it comes to granting licences to all banks in the euro area, regardless of their size," she said. "We work closely with the national supervisors and thoroughly assess banks' applications together with them, but to ensure consistency in the euro area the final decision rests with us."

"During the process we review banks' risk management and governance frameworks, for example, and will insist that they have adequate capabilities in place. We will also carefully review to what extent banks plan to transfer their market risks to a third-country entity via back-to-back transactions. While we do not rule out this practice per se, ultimately we expect banks to manage relevant parts of their risks locally and independently," she said.

The extent to which it would be acceptable for subsidiary banks to transfer risks associated with EU transactions back to a UK parent company would depend on factors such as size, risk and complexity, and the number of staff based in the euro area covering risk management activities, she said. Ultimately, the ECB was unable to rule out "the possibility of a parent institution suddenly finding itself in a position where it cannot fulfil its responsibilities", she said.

"The local entities therefore need to be in a position to manage at least parts of the risks taken – actively and on a routine basis," she said.

The ECB was expecting to increase staffing levels over the coming years in order to deal with an anticipated "significant increase" in licensing applications and supervision activity, she said.