Passporting Rights

ECB: British banks sleepwalking into Brexit

123225031 City of London Reuters main
Maybe they should consider more building in Europe, too. Source: Reuters

British banks have yet to face up to a major problem: After March 2019, they could quite literally be barred from operating in the rest of the European Union. That’s because their British banking license may no longer be valid in the European Union’s remaining 27 members.

That reality affects more than 100 British banks with operations in the rest of the EU. While most of them have no doubt started planning for life after Brexit – some have already announced plans to move staff into continental Europe – the European Central Bank warns they many have yet to face up to the bureaucratic side of the equation.

“In the case of a hard Brexit, the access of these institutions to the single European market could disappear from one day to the next,” Korbinian Ibel, a general director of the European Central Bank, told a Handelsblatt-sponsored conference on regulation in Frankfurt on Wednesday. “Given that, it surprises us somewhat that we have only been contacted by about half of these affected banks.”

With negotiations between Brussels and London moving at a snail’s pace, the prospects of a so-called hard Brexit – which would see Britain tumble out of the EU’s single market without any deal to replace it, and banks frozen out of the EU marketplace in March 2019 – is looking increasingly likely. Michel Barnier, the EU’s chief negotiator with London, warned earlier this week that no exceptions will be made for financial firms: “Brexit means Brexit, everywhere,” he said.

Should the worst happen, only British banks with a subsidiary in another EU country will be able to continue offering loans, investments and other financial products to European customers. The EU’s so-called “passporting rights” allow banks with a license in one country to operate across the entire bloc.

“The legal consequence of Brexit is that UK financial service providers lose their EU passport.”

Michel Barnier, EU negotiator on Brexit

Mr. Ibel said that even among those British banks that have contacted the ECB, the number that have actually begun the formal process is appallingly low. “The formal application is what ultimately leads to licenses being granted, not informal talks. We hope this will start to pick up soon,” he said.

Many British banks appear to be playing for time, holding out hope that there will be a two-year delay in Britain’s exit, which would allow negotiators more time to reach a deal that might even include extending passport rights for EU banks to Britain. But until that happens, Mr. Barnier was clear: “The legal consequence of Brexit is that UK financial service providers lose their EU passport,” he said.

Some pro-Brexit British politicians have suggested Mr. Barnier may be bluffing. “The EU needs the City of London more that it needs the EU,” Gerard Batten, a member of the European Parliament for the UK Independence Party, told Britain’s Daily Express newspaper. But even if there may be some truth to that, the ECB is warning banks it’s better to be safe than sorry. Sabine Lautenschläger, deputy head of financial supervision at the ECB, last week warned that “the clock is ticking” for small and large banks alike in Britain. “The banks are not as far a long as we would like.”

Time is short because building an EU subsidiary is a tricky and costly process that can take one to two years. Mr. Ibel stressed that the ECB won’t be skimping on supervision just to make the transition easier – no matter how eager cities like Frankfurt and Paris are to get British banks to settle on their shores. Germany’s Bundesbank issued a similar warning: “We don’t make regulation based on economic incentives,” said Erich Loeper, in charge of regulation at the central bank.

Nor will the ECB accept banks that set up “hollow shells” on the continent, where decision-makers sit outside the EU. The supervisor expects these subsidiaries to be “fully functional,” Mr. Ibel said. Even smaller banks, while they might be able to get away with moving personnel to Europe, need to prove that their EU subsidiary can operate independently of the parent bank, he said. In other words, they had better get started before it’s too late.

Andreas Kröner is a banking correspondent for Handelsblatt based in Frankfurt. Christopher Cermak of Handelsblatt Global adapted and contributed to this article. To contact the author: kroener@handelsblatt.com and cermak@handelsblatt.com

We hope you enjoyed this free article.

Subscribe today and get full access to market-moving news in Europe's leading economy.