Britain’s decision to exit the European Union isn’t just affecting private banks; it is also impacting their regulators.
This week it has become clear that the European Banking Authority, the chief banking regulator for the entire 28-nation European Union, will be one of the first casualties for London as a financial center.
“Following the outcome of the U.K. referendum, the EBA is likely to be relocated to another E.U. member state,” EBA Executive Director Adam Farkas told Handelsblatt.
Frankfurt and Paris are considered likely locations, according to sources in European circles. The news agency Reuters earlier reported the possibility.
The ultimate decision will be taken by European legislators as they iron out the details of Britain’s exit, Mr. Farkas said.
“Until a legislative decision is reached, the EBA will continue to operate in London, fulfill its responsibilities and continue to work towards the achievement of a consistent and transparent functioning of the single market for the entire E.U. banking system,” he said.
The “single market” is where the key challenge lies. If Britain exits the European Union as expected, the biggest question is whether Britain can negotiate continued access to the remaining 27-nation European Union’s market for goods and services.
“Following the outcome of the U.K. referendum, the EBA is likely to be relocated to another E.U. member state.”
This matters to banks – not just British ones but also to international banks that have set up shop in London but want to lend and invest across the entire bloc. If Britain loses access to the single market, many of these banks are expected to move resources to another European Union member.
Some banks aren’t waiting for that decision to be taken – talks between Britain and the European Union over their post-E.U. relationship will last at least two years – and have already indicated they will move operations.
Mr. Farkas added his voice to those predicting a Brexit could have a major impact on London’s place as the financial center in Europe.
“One of the attractions of London stems from the integrity and the freedom of the single market,” he said, “and therefore a lot of international banks are using the U.K. or London to concentrate a lot of their European activities here to serve the entire European market.”
He added: “Now that the U.K. voted to leave the E.U., subject to the terms of the leave, international banks are expected to rethink their strategy and locations.”
Besides settling the question of its headquarters, the European Banking Authority is carrying on largely as normal. Its key task for the coming months is another round of “stress tests” examining the health of Europe’s banks.
Mr. Farkas said the “objective and nature of the stress test is changing.” That’s because the needs of Europe’s banks and their regulators have shifted since the 2008 financial crisis.
Gone is the need to make sure that banks aren’t about to collapse. Stress tests in the aftermath of the financial turmoil, also conducted by the Federal Reserve in the United States, were watched closely by investors for indications of which banks would be able to survive.
The EBA itself at times came under severe criticism for not being tough enough on Europe’s banks, many of which especially in southern Europe came repeatedly near collapse as the euro-zone’s debt crisis almost spiraled out of control.
It was not until the European Central Bank became involved in 2014 that the process was widely considered more credible. The central bank that year began taking over responsibility for supervising banks in the 19-nation euro zone and carrying out the EBA’s stress tests.
With another round of stress tests now on the horizon, the focus for Europe’s struggling banking landscape has been more on long-term profitability. Most banks may no longer be in danger of collapse, but many are shrinking their businesses, their balance sheets and struggling to lend out cash.
Mr. Farkas said the new stress tests, which place less of an emphasis on specific capital requirements, are designed to reflect that new dynamic.
“During the height of the financial crisis, its objective was to put pressure on banks to quickly recapitalize and increase the overall capital levels in the system… Now capital levels and ratios have improved significantly so that there isn’t an immediate capital need across the whole system,” he said.
“So the focus of the stress test is shifting for a new setting, which is a more long-term and business-as-usual setting of a stress test,” he said, adding that the stress test was becoming “one of many tools” that supervisors like the EBA can use to keep watch over Europe’s financial sector.
The European Central Bank will be involved once again as well. Mr. Farkas said it is up to the EBA to provide the methodology but for other supervisors like the ECB “to conduct the quality assurance process and to decide on any supervisory action.”
Yasmin Osman is Handelsblatt’s banking and regulatory correspondent based in Frankfurt. To contact the author: Osman@handelsblatt.com