14 July 2016

ドイツ連邦銀行ドンブレット理事、銀行部門や経済にとって英国のEU（欧州連合）離脱に伴う不透明性は最小限に食い止めるべきと主張

Keynote Speech at a Conference of the Association of German Banks Center for Financial Studies, Goethe University Frankfurt

2 Banks face immediate economic consequences

[...] A closer look reveals that shares of many financial institutions have dropped strongly since the referendum, and valuations still remain significantly lower than shares of non-financial sectors - not just in the UK but also in the rest of the euro area. This is a sign that other, more deeply rooted structural problems prevail in the European banking sector. I will touch upon one of these issues later on in my speech. [...]

In this context, I wish to pay tribute to the professional approach of the Bank of England before and after the referendum - which demonstrated excellent preparation as well as execution on its part. The ECB and other central banks, too, declared that they would stand ready to supply liquidity should the need arise. However, up to now, no provision of additional liquidity has been necessary.

All of the actions taken have certainly helped to ward off stronger financial market reactions. But this doesn’t necessarily imply that the financial markets have already found their new equilibrium. Nobody can rule out further movements in prices or shifts of funds from one asset class to another. Nevertheless, one can be cautiously optimistic that - regarding the financial markets - a panic reaction to Brexit is rather unlikely at present.

Indisputably, it is to a large extent the United Kingdom that will have to bear the consequences of the referendum. Consumer confidence declined rapidly. Already in May, the Bank of England expected UK GDP growth to slow down to 2 percent in 2016 as a result of heightened uncertainty - new forecasts in the wake of the referendum are of course bound to paint a gloomier picture. For the EU as a whole, European ministers of finance have reduced their growth expectations by 0.2 to 0.5 percent for 2017.

In the economic growth forecasts presented by the Eurosystem, a Brexit was one of the downside risks to the projections. The impact on medium-term economic growth will depend strongly on expectations concerning the long-term economic consequences of the referendum, which in turn will hinge on the outcome of the exit negotiations. The chain of causality runs from the single market to productivity: The more restricted access to the single market becomes, the more trade will be inhibited and the more productivity will be curbed - both in the UK and the EU.

In any case, while the impact of Brexit on growth will be negative, fears of a fall in growth in the euro area by, say, 0.6 percentage point in 2017, as predicted by Consensus Economics, seem exaggerated.

3 Political vagueness within the reach of vision

What does the referendum result imply for the future of the pan-European financial system? In some ways, I would expect clear consequences.

Here, I refer, in particular, to the pulling power of London as a platform for European bond, derivative and forex trading. Banking supervisors take a critical view of the fact that euro activities are mainly based in London and therefore outside the euro area. This criticism has, of course, intensified since the referendum. The same can be said for clearing business and central securities depository services, at least for euro-denominated business. Supervisory authorities would need to be a lot more tolerant if this business were allowed to be conducted not just outside the euro area but outside the EU altogether. Truth be told, that's a level of tolerance I can neither imagine nor support.

Against this backdrop, the announced merger plans of Deutsche Börse and the London Stock Exchange need to be re-evaluated. The outcome might seem bizarre at first glance, but the referendum has given positive impetus to, and even bolstered, the economic rationale behind such a merger. Once the UK has left the European Union, bridges between both economies will be more important than ever before. The announced merger of LSE and Deutsche Börse has the potential to become such a bridge.

Clearly, the Leave vote poses new challenges for the corporate governance of the merger: The parties concerned need to find a governance structure which balances all reasonable interests - even at the expense of synergies. Furthermore, I am convinced that, in the medium term, euro clearing cannot take place to the existing extent in London - Frankfurt would be the more appropriate alternative. The Referendum Commission set up by Deutsche Börse and LSE is now being put to the test in terms of its ability to work calmly, and needs to keep in mind the economic rationale of the proposed merger which has gained greater credence through the Brexit vote.

But uncertainty following the Brexit decision is much less due to economics and much more due to politics. Indeed, almost all the economic consequences are associated with political uncertainty. As we all know, economic uncertainty is a product of political uncertainty. [...]

So what could happen with respect to the passporting regime once the negotiation period has ended? One thing is clear: It will very much depend on politics.

In the event that the United Kingdom decides to remain a member of the European Economic Area (EEA), not a great deal would change for banks and enterprises on both sides of the Channel. EU rules for banking super-vision equally apply to members of the European Economic Area. Current supervisory powers would likewise remain unaffected.

Naturally, EU membership does not only cover free trade. It also means applying the full body of EU legislation, a key component of which is freedom of movement. On the one hand, financial institutions in London have benefited from the stream of human capital from the mainland. On the other, the negative consequences that it is claimed arise from free movement are issues that numerous "Brexiteers" in the run-up to the referendum have cited as reasons why they believe the UK should leave the European Union. For some, EEA-membership is regarded as the equivalent of jumping from the frying pan into the fire. Many other forms of cooperation are therefore also imaginable, including established models such as the WTO framework.

For banks, a situation in which the UK were to become a third country would allow for a spectrum of outcomes, depending on what is negotiated. At the lower end of cooperation, an ordinary third country status would require UK banks and banks from foreign countries to obtain licenses for their branches in any given EU country. Also, working capital would be required as a basis for supervision - I may ascertain this at least with respect to Germany. This should indeed give incentives to banks from third countries to establish subsidiaries in only one EU country and in this manner avoid the need to acquire more than one license in the EU.

Even so, the ordinary third country statues may significantly interfere with the current business models of banks. For those foreign banks that currently use their UK subsidiaries as a hub for the European market, the UK serving as a third country would compromise their business models in the EU.

Certainly, there would still be room for further bilateral agreements. Thus, German authorities could grant exemptions to foreign institutions. For banks with a British license, a more favourable supervisory treatment is conceivable. Supervision might even be performed in a manner akin to if the UKwere an EEA member.  But this hinges upon several requirements. Most importantly, the UK would have to follow the internationally approved canon of supervisory policies. If this were the case, EU members would want to protect themselves against any form of regulatory arbitrage. Also, this would require substantial, political willingness on both sides. However, such political goodwill might suffer if and when Brexit goes ahead. We will have to wait and observe.

Generally speaking, we cannot make reliable predictions about the future  legal framework for banking across the Channel. Planning uncertainty is bound to be costly. Businesses on both sides of the Channel are unable to make any longer-term plans as long as these conditions haven't been clarified. On the other hand, location shifting takes time and encourages banks to react well ahead of political certainty. Also, it's very much up in the air whether the spell of uncertainty will be over after two years or whether the negotiating parties will have agreed, by mutual consent, to extend the negotiating period.     

4 Moving forward with uncertainty

[...] While negotiations have not even started, there are some definite conclusions to be drawn from the referendum result: 

• Financial institutions have to prepare for a scenario in which euro-denominated trading and clearing is unlikely to have a future outside theEU.
• Regarding the merger between Deutsche Börse and London Stock Exchange, the referendum outcome has even strengthened the economic rationale. But in order to reap the benefits, contracting partners should now invest in a well-balanced governance structure.
• Financial actors in Europe have so far succeeded in digesting the somewhat surprising referendum result. Even ongoing volatility should not serve as an excuse to bypass the pillars of financial stability we have only just set up in the EU.

Please let me shortly expand on this last, but important point. I am referring, in particular, to the challenge of actually making investors in banks liable in case of a bank failure, a concept also known as "bail-in". For that purpose, a codified bail-in mechanism now exists, which has been fully operational since the beginning of this year. If we allow states to provide discretionary aid to their banks, this impedes a core element of the bail-in regime, namely its credibility.

If the bail-in mechanism were to be exposed or even dismantled, markets would no longer exert their disciplinary function. The management of banks will always be likely to maintain a safety buffer over and above supervisory capital requirements as they face resolution in case of falling short of these requirements. If bank supervisors were to observe the dismantling of the bail-in mechanism, I am convinced the logical and necessary consequence would be for supervisors to raise capital requirements so as to compensate for the lack of market discipline. [...]

Full speech

© Deutsche Bundesbank