28 October 2018

Financial Times: No ‘white knight’ for banks in no-deal Brexit, EU regulator warns

“I’ve told the banks that for now you can’t hope for the white knight to come along so rather look at it, be prepared,” Ms König said.

She also warned that any banks moving to the EU to retain access to the bloc’s market could not carry out “letterbox” relocations and would have to move “real people” — so regulators could effectively take charge of the institutions in times of crisis.

“It needs to be an entity within the group where we have an understanding of what, if something goes wrong, will happen, and how do we get control,” she said. Both the EU and the UK have stepped up their general no-deal Brexit preparations as talks on an exit agreement drag on. With an exit agreement, the SRB’s concerns would not immediately arise when Britain leaves — but many matters affecting the financial sector would be left unresolved by a no-deal Brexit.

Ms König referred to rules requiring banks to issue a minimum amount of unsecured debt and other securities that can be easily written down by regulators if the institution fails. The idea behind the measure is that imposing losses on the holders of the securities helps to repair the bank’s finances. Her board determines how much of these so-called “minimum requirement for own funds and eligible liabilities”, or MREL, a bank needs to issue. The European benchmark is set at 8 per cent of liabilities.

If Britain leaves the EU without an exit deal, bank bonds issued under UK law will no longer be eligible as MREL unless banks insert contractual clauses to make clear that the SRB can wipe out the securities. Failing this, banks could issue extra debt to meet their target.

According to industry estimates, there is more than €100bn of MREL-eligible bank debt that has been issued under English law by European banks based outside the UK.

Ms König said banks should not assume a regulatory solution and should prepare for the worst. “In principle, any issuance under UK and English law . . . will become third country issuance and will not be MREL-eligible unless it has a suitable relevant contractual clause,” she said.

She said that while larger banks had been making preparations, the SRB wanted to make sure the industry was fully prepared and that smaller banks were not caught off guard. The SRB is set to publish guidance for banks in the coming weeks.

Ms König said that banks relocating to the eurozone in response to Brexit would need to move enough personnel and data systems so the SRB could get access to the information it would need should the lenders get into difficulties.

“We are currently in dialogue with the banks, so individual institutions get a checklist of what we expect them to do”, Ms König said, adding that the priority was to make sure that the SRB could successfully intervene if they failed.

Ms König said her aim was not to “put a big fence” around the EU.

Her comments reflect a broader EU stance that the financial sector itself, rather than public authorities, should lead preparations for a no-deal Brexit. EU officials believe that if they make too many contingencies, it would be tantamount to helping the UK preserve London’s valuable access to the EU single market by the back door. [...]

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