19 March 2019

Financial Times: Germany raises alarm about small businesses’ Brexit exposure

Germany’s central bank is warning that many of the country’s smaller companies are failing to prepare for the potential disruption of the UK’s exit from the EU this month and could lose access to financial services as a result.

Banks have been shifting market-related activities for EU clients — such as derivatives clearing and currency swaps — from London to booking centres in Frankfurt, Paris, Dublin and other cities outside the UK to avoid disruption from Brexit.

However, the banks can only move clients’ business if they have given their permission to do so, which typically requires each client to negotiate and sign a new contract.

Central bankers at the Deutsche Bundesbank are growing increasingly concerned at the slow pace of this “repapering” process ahead of Brexit, which is due to happen on March 29, although the UK may ask for a delay.

“The banks are approaching their clients which might be affected by Brexit. The snag is that the response is very limited,” Joachim Wuermeling, a Bundesbank board member, told the Financial Times, adding that “too many clients do not react at all”. 

Mr Wuermeling said that “even if Brexit will be postponed, all EU companies, be them small or large, are well advised to check hidden financial links to the UK”. 

He gave the theoretical example of a family-owned German machine tool maker that sells machinery to India and uses a Frankfurt-based bank to buy currency swaps to manage its foreign exchange risk.

For now, this transaction involves the lender’s London-based subsidiary. But it will be handled out of Frankfurt after Brexit. Without agreeing a new contract with its bank, the company would be cut off from the financial service. 

Mr Wuermeling warned that in the first days after Brexit, the economy could see much “small-scale gridlock, which may negatively affect wider economic sentiment”. 

Stefan Hoops, head of Deutsche Bank’s global transaction bank, said such a scenario was a realistic one. “Large segments of the real economy will have access to fewer banks [after Brexit],” he said, pointing to the fact that many small and medium-sized companies have not taken the necessary steps to become Brexit-ready.

Mr Hoops said this could create a competitive opportunity for Deutsche Bank to win market share among medium-sized corporate clients. [...]

Full article on Financial Times (subscription required)

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