From the European perspective, after Brexit the United Kingdom has become a third country.... Brexit has itself been a fragmenting force. The equivalence framework ...does not foresee to grant market access similar to the freedom to provide services within the Single Market.
Thank you for your invitation to the German Symposium. Even though
the United Kingdom and the European Union might have come to a fork in
the road institutionally, we continue to be bound together by countless
economic, cultural and personal ties. This event is testament to that.
In
any other year, Brexit’s final form and its potential repercussions
would probably have been the most discussed topic in the hallways of
European parliaments and government buildings. But unfortunately, as we
all know this was not the case for the year 2020.
One year ago,
Europe recorded its first cases of the coronavirus (COVID-19), and we
remain very much in the grip of the pandemic today. Thankfully, banks
absorbed the first economic shock of the pandemic much better than they
did the hit of the great financial crisis. The regulatory overhaul
carried out by the international community following the last crisis
significantly increased the resilience of the banking sector and enabled
public authorities to launch a decidedly countercyclical response to
the financial fallout of the pandemic. It is too early to pass a final
judgement, but the efforts to strengthen the capital and liquidity
position of banks, improve their measurement and management of risks,
and establish buffers in good times – to be used in stressed conditions –
paid off in this first phase of the COVID-19 crisis.
The policy
response in the wake of the great financial crisis brought with it a
resurgence of a territorial approach to financial regulation and
supervision. Mervyn King, then Governor of the Bank of England, famously
bemoaned the fact that global financial players were international in
life, but national in death. Theoretically, this tension could have been
resolved in one of two ways – either via international treaties
providing robust legal underpinnings to international crisis management,
or by segmenting the business of global institutions along national
lines. In other words, by making global banks international also in
death, or by making them more national in life and driving cross-border
groups towards looser combinations of local establishments. In the
aftermath of the great financial crisis, the first option never gained
much traction, aside from a few proposals from legal scholars and (even
fewer) policymakers. International standards on crisis management were
developed by the Financial Stability Board, based on best practices;
additional requirements on loss-absorbing capacity were also agreed to
make large global players resolvable too. But, at the same time, it was
made clear that this loss-absorbing capacity had to be localised to a
significant extent at each subsidiary and that crisis management
procedures would need to take place within the boundaries defined by
local legislation. We gradually moved into the world of intermediate
holding companies or parent undertakings – a de facto request for global
players to have self-contained subgroups or subsidiaries in each
relevant jurisdiction, subject to all relevant local requirements and
intensified supervisory scrutiny. The concepts of equivalence and
alternative compliance, which retain an important role in securities
regulation and provision of financial market services, were not applied
to a significant extent in the prudential sphere: local supervisors
tended to rely less and less on the assessment of the home authorities,
which resulted in material duplication of supervisory and reporting
requirements.
The ring-fencing that dominated the response to the
great financial crisis happened also within the European Single Market.
But the post-crisis financial reforms provided an opportunity to
strengthen the regulatory and supervisory underpinnings of the Single
Market. The European Supervisory Authorities were established, with a
mandate to pursue maximum harmonisation (the single rulebook) and
supervisory convergence. A legal basis was provided for national
competent authorities to take joint prudential decisions on cross-border
groups, thus establishing joint responsibility between national
authorities in a number of key prudential matters, including preparing
for and managing crises. Finally, the banking union delivered the much
needed institutional set-up for greater market integration, with the
Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism
(SRM) providing full alignment between supervision in going concern
situations and the management of banking crises. The Single Resolution
Fund, with a common backstop, now also provides a common safety net for
banks that are a cause for system-wide concern at the European level.
While
the international framework focused on stronger international standards
but moved to more territorial approaches to prudential supervision and
crisis management, the European framework coupled a fully unified set of
prudential rules with a single institutional framework for supervision
and crisis management. This different trajectory of the integration of
regulation and supervision of banking activities has relevant
implications for Brexit.
From the European perspective, after
Brexit the United Kingdom has become a third country. In other words,
Brexit has itself been a fragmenting force. The equivalence framework
that governs the relationship with third countries in the area of
banking services does not foresee to grant market access similar to the
freedom to provide services within the Single Market. For banks
providing banking services to EU customers from the United Kingdom, as
well as for European banks servicing UK customers from the EU, this has
meant a significant effort to relocate business.
Over the past few
years the ECB has been continuously engaging with banks and urging
those relocating to the euro area and also our banks operating in the UK
to prepare for Brexit. Most banks have understood that empty shell
institutions are not acceptable in the euro area, and that they must
allocate capital, liquidity, top management with effective
responsibility to steer European business, and an appropriate quality
and quantity of resources in charge of risk management to establishments
within the banking union. This must be done in a way that is
commensurate with the activities and risks undertaken with European
customers and counterparts. We continue to stress this message in our
conversations with banks and we will closely monitor how they implement
their plans and build up their capabilities within the EU.
As a
result of the preparations requested and monitored by the ECB, the
transition to the new regime went smoothly, without banks suffering from
market or liquidity disruptions related to Brexit. Likewise, thanks to
banks progressively building up their capabilities, there have so far
been no major disruptions to the servicing of EU clients.
According
to their Brexit plans, incoming international banks intended to move a
total of around €1.2 trillion worth of assets to institutions supervised
at the European level. Banks headquartered in the banking union also
planned to move a substantial amount of their capital market business
from the United Kingdom to the EU. Many significant banks have made
considerable progress towards achieving their post-Brexit target
operating models agreed with ECB Banking Supervision. As at September
2020, around €810 billion worth of capital market assets still needed to
be moved by significant institutions. The ECB continues to monitor
banks’ progress towards these models in terms of assets, staff and
booking practices.
We have expressed some concerns about the
possible fragmentation of international banks’ presence in the euro
area. Several incoming banks plan to conduct business in the EU via
investment firms, which, under the current regime, are solely supervised
at the national level and as such are out of the scope of the ECB’s
direct supervision. The new legislation on investment firms that will
come into force in June this year will significantly improve this set-up
and ECB Banking Supervision, following the PRA’s model, will soon
assume direct responsibility for the prudential supervision of
systemically relevant investment firms in the area. However, some banks
also plan to access EU markets through channels that are enshrined in
national law, such as third-country branches in EU countries and direct
cross-border access for the provision of investment services to retail
clients. Such a fragmented structure limits the integrity of supervision
and may even be used to avoid direct supervision by the ECB, but we
know that this is due to some regulatory loopholes in our own European
framework.
This focus on the relocation of activities and on the
effectiveness of prudential controls on financial services provided to
EU customers would, however, be short-sighted if we didn’t acknowledge
the close connections that will remain between the banking sectors in
the EU and the United Kingdom for years to come. To a very large extent,
European corporate issuers of equity, debt securities and syndicated
loans continue to directly rely on banks headquartered outside the EU,
particularly in London. Even after full migration of assets to the EU
according to the agreed target operating models, the safe and prudent
management of global banking groups will remain an essential ingredient
of financial stability in any jurisdiction in which they have a
significant presence. Moreover, the provision of financial services is
becoming increasingly mobile, also thanks to the trend towards
digitalisation that the pandemic has further accelerated. Regulators and
supervisors would be facing a rude awakening if they thought that their
more territorial approach could succeed in neatly boxing in financial
activities and containing risks in their domestic jurisdictions. Due to
financial markets innovating constantly, interconnections and channels
of contagion will always take new forms and the only possible remedy is
strengthening supervisory cooperation across borders.
The ECB is
committed to cooperating closely with the UK supervisory authorities.
The infrastructure for such cooperation has been put in place. In April
2019, the ECB agreed a comprehensive post-Brexit cooperation framework
with the UK authorities in the form of a Memorandum of Understanding,
which came into effect on 1 January 2021. The Memorandum of
Understanding, which is based on a template prepared and negotiated by
the EBA, covers the prudential supervision of entities other than
insurance undertakings and pension schemes. It provides for the exchange
of information as well as the reciprocal treatment of cross-border
banking groups. The ECB and the Prudential Regulation Authority (PRA)
have also agreed on how to share responsibilities relating to the
supervision of branches. We have signed a statement of intent on the
exchange of benchmarking information and analyses of relevant entities
of groups headquartered in other third-country jurisdictions, as far as
allowed by applicable law. Last but not least, the European Commission
and the UK government have stated their intention to negotiate a
Memorandum of Understanding on regulatory cooperation in the area of
financial services by March 2021. The ECB will be involved in this
cooperation as appropriate, in line with its central banking and
supervisory competences.
Formal agreements and structures for
cooperation aside, we all know that regular, open and frank discussion,
at all levels of our organisations, is the most important ingredient for
tackling issues in a coordinated fashion, especially in times of
crisis, when tensions may well arise and objectives may become
misaligned. I am glad to say that ECB banking supervision and the PRA
have built very solid foundations for supervisory cooperation and I am
sure this will help address the challenges that are certain to arise in
the post-Brexit world.
I now look forward to our discussion.
SSM
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