ECB review of banks’ EU activity risks triggering stand-off with UK regulators

The European Central Bank aims to complete a detailed assessment of how international banks manage their EU business by early next year, in a move that risks triggering a stand-off with UK regulators over the location of senior staff and capital.

International banks are concerned they could face competing demands from eurozone and UK regulators over how they structure their European operations once the ECB completes its so-called “desk-mapping” exercise — a detailed review of how banks have set up their EU operations, including where they locate staff and capital.

The assessment is designed to establish how widely banks use various techniques to transfer the risk of EU operations outside the bloc, in particular to the UK, where many had based their European operations before Brexit.

One of these techniques involves using back-to-back models, which allow banks to offset EU trades with their London entities and effectively manage the risk from the UK. Another is desk-splitting, in which banks handle EU clients or assets jointly from desks both on the continent and in the UK.

The assessment has already prompted high-level talks between eurozone and UK supervisors after the Bank of England expressed concern that the ECB appeared to be attempting a “hollowing out” of some big international banks’ UK-based operations, according to a person briefed on the matter.

The ECB has reassured the BoE that the review is no different to similar assessments carried out by other major central banks, and it is not asking banks to move more staff or capital out of the UK than they have already agreed to, the person said.

A second person familiar with the conversations said the UK regulator did not expect to be “blindsided” by fresh demands to move people and capital out of London.

The subject has been a thorny issue since the UK left the EU without a trade agreement for the financial services sector in January 2020. Most international banks favour keeping as much of their investment banking and capital markets operations as they can in London to maximise efficiency.

By March 2020, the ECB said banks had agreed to move more than €1.2tn of assets from the UK to their eurozone offshoots, quadrupling their size as measured by assets compared with the end of 2017.

Despite this, the ECB has since stepped up its calls for banks to add hundreds of extra staff and billions of extra capital to their post-Brexit operations in continental Europe.

This has led to tensions with both the Prudential Regulation Authority and the Financial Conduct Authority. One UK regulator told the FT that while there was “really strong technical co-operation” with counterparts in Frankfurt “the politics is difficult”.

“Where we have to be vigilant is to ensure requirements to move activities or resources which are [presented as] motivated by regulatory purposes aren’t cover for things that are motivated by industrial purposes,” the person said.

If that occurs, UK regulators will “have a conversation with the firm and say ‘no, we don’t see that as justified’,” the person added. “We have had to do that already . . . we have to be pretty careful they’re not doing things that are harmful for market integrity from our point of view.”

Speaking at a recent event, PRA head Sam Woods said he was “relatively sanguine” about the level of movement so far, but it would be “unacceptable” if it escalated to a point where London risked being hollowed out.

The ECB has spent several months reviewing how banks with sizeable operations in the EU handle clients and assets based in the bloc. It expects to share the findings of its exercise with banks and supervisors including the BoE in the next three months. It has not decided whether any findings will be made public.

Some banks expect the exercise to result in having to materially increase their presence in the EU.

The Frankfurt-based institution’s position was underlined by Edouard Fernandez-Bollo, an ECB supervisory board member, last month when he said that “empty shell institutions are not acceptable in the euro area”. He added: “Activities and services involving EU clients should be carried out predominantly within the EU.”

The ECB declined to comment on tensions around the exercise, as did the PRA.

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