Assessing Risk

ECB Bracing for Brexit

epa04818422 European Central Bank (ECB) President Mario Draghi (L) and British Prime Minister David Cameron (R) during European heads of state and governments summit at the EU Council headquarters in Brussels, Belgium, 25 June 2015. The EU summit is expected to be dominated by the migration situation and Greece, plus Britain's renegotiation of EU membership. Greek Prime Minister Alexis Tsipras expressed confidence that a deal to avert bankruptcy for his country can still be found. EPA/OLIVIER HOSLET [ Rechtehinweis: usage Germany only, Verwendung nur in Deutschland ]
ECB President Mario Draghi (L) and British Prime Minister David Cameron (R).
  • Why it matters

    Why it matters

    A British exit from the E.U. would send shockwaves through the European financial system, and banking supervisory authorities are drafting contingency plans.

  • Facts

    Facts

    • Financial sources told Handelsblatt the possible impact of Brexit on Europe’s banks has become one of the top issues for ECB supervisors.
    • There is concerns focus on currency volatility and losses from pound-denominated loans and from currency hedging contracts.
    • Bankers want the ECB and the U.S. Fed to make emergency liquidity available to banks if there is a Brexit.
  • Audio

    Audio

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There’s been no shortage of warnings about the implications of Britain’s exit from the European Union. The chief executive of U.S. banking giant  JP Morgan, Jamie Dimon, said last month that Brexit could lead to “massive dislocation,” Bank of England Governor Mark Carney said there could be a financial crisis and economists have predicted a severe recession.

The European Central Bank has yet to make a statement on the Brexit referendum looming on June 23. But it regards Britain leaving as a serious threat to the stability of the European financial system.

Financial sources told Handelsblatt that the possible impact of Brexit on Europe’s banks has become one of the top issues for the ECB supervisors in recent weeks. One central banker described a Brexit as “the biggest danger for financial stability this year.”

To avoid nasty surprises, the ECB is closely examining individual banks and has been asking big banks in particular about the possible risks resulting from a Brexit, the sources said.

One central bank source said the ECB was talking about conceivable risks “with larger banks as part of ongoing supervisory talks.” The source added: “In this context Brexit is an issue.”

The ECB declined to comment.

Senior bankers said the supervisors want to know how well the banks are prepared for Britain quitting. One of the questions is how well the currency trading systems are prepared for the extreme market volatility that Brexit could trigger.

“In the coming weeks the banking supervisors will ask for more detailed information from banks and push this issue more forcefully,” said one insider.

Andreas Dombret, a board member of the Bundesbank, the German central bank, confirmed that supervisors were talking to banks about Brexit. “It would be bad if a supervisory authority weren’t thinking about this,” he said.

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