The eurozone’s top banking watchdog has warned it will take a tough line in policing banks that relocate operations from the UK in response to Brexit, saying that lenders must move enough staff and resources to the continent to cope with the risks that they would run.
Danièle Nouy, the head of the Single Supervisory Mechanism, or SSM, vowed to crack down on lenders seeking to save their market access on the cheap by running big operations through shell units or tiny branches, saying that there could be no compromise when it came to financial stability.
Ms Nouy and her deputy, Sabine Lautenschläger, said on Monday that they were preparing for new strategies by banks that had to adapt to losing the coveted “passporting” rights that come with Britain’s EU membership. The passport allows banks and other financial companies to provide a wide range of services across the single market while only being legally domiciled in one EU country.
Ms Lautenschläger said that, once the passport was gone, a simple method for banks wanting to safeguard access would be to relocate some operations to the euro area and apply for a banking licence from the SSM, something she said would come with stringent conditions.
“We will only grant licences to well-capitalised and well-managed banks,” Ms Lautenschläger said. “We will not accept empty shell companies. Any new entity must have adequate local risk management, sufficient local staff and operational independence.”
The SSM, which operates as a wing of the European Central Bank in Frankfurt, has faced mounting criticism that it has not been tough enough in its oversight of lenders, notably in the saga of restructuring bad debts on the books of Italian lender Monte dei Paschi di Siena, which failed last year to attract enough private capital to shore up its balance sheet and is set to receive state help.
The supervisor was set up in 2014 to restore faith in the soundness of euro area lenders after the impact of the sovereign debt crisis.
A specific concern of the SSM’s leadership is that, without strong vigilance from Frankfurt, financial groups might prompt a regulatory “race to the bottom” by targeting EU countries perceived to have lighter-touch supervision. Similar concerns have been expressed by the European Commission.
“This runs counter to the idea of a level playing field in the euro area,” Ms Lautenschläger said. “It is an invitation to banks to engage in regulatory and supervisory arbitrage.”
Despite the tough line on relocation, the officials said that banks that move operations to the continent might be able to benefit from phase-in periods to allow time for them to come fully into line with EU rules.
These phase-in periods would be more generous for less risky or complex activities, they said, adding that they could last from a few months to between one and two years.
The SSM is already working closely with its counterpart in the UK, the Prudential Regulation Authority, to assess the riskiness of banks’ operation.
“The UK will always be important. We have banks that are working in the UK and they will go on working in the UK,” said Ms Nouy.
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