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08 August 2018

Financial Times: Finance watchdog relaxed about bank models after Brexit


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The UK’s financial watchdog has told banks it is sanguine about what model they use as they move business to the EU after Brexit, a stance in contrast to the approach from European regulators.


[...]

In a letter to chief executives across the City of London, Andrew Bailey, the head of the Financial Conduct Authority, said the regulator was “open to a broad range” of arrangements on how to book risk and profit, provided they were properly overseen. The European Central Bank has taken a much stricter line.

But the FCA warned that boards had to ensure any harm from post-Brexit arrangements was mitigated and that firms expanding EU operations had to do so in a way that still allowed the FCA to properly oversee any UK business. What to do about so-called booking arrangements once the UK leaves the EU has become an urgent issue as the chances of a no-deal Brexit rise. Philip Hammond, the UK chancellor, warned City bosses last month that it was important to prevent a widespread shift of regulatory capital across the Channel. For its part, the industry fears Brexit will fragment European financial markets, forcing banks to split up pools of capital that they have concentrated in London.

Brexit means they will lose the ability to “passport”, which enables them to base themselves in one EU country and sell their products and services across the bloc, without the need to trap capital or for separate regulatory oversight.

“We are aware that some authorities elsewhere in Europe have set out specific requirements as regards business models. We are open to a broad range of legal entity structures or booking models,” said Mr Bailey’s letter, dated August 8. “This includes those making use of back-to-back and remote booking, providing their associated conduct risks are effectively controlled and managed.” [...]

Full article on Financial Times (subscription required)

Letter

Related article on Financial Times: Hammond sees dangers of bank capital shift after Brexit

[...] To judge from a leaked account of his comments to a group of City of London business leaders last month, Philip Hammond seems to have been paying close attention to this point of view.

The chancellor told City bosses that “preventing the wholesale movement of regulatory capital into Europe was key” — which he also acknowledged during discussions at a Blenheim palace dinner for Donald Trump a few weeks earlier.

Regulatory capital refers to the equity that banks are required by the authorities to have against their assets so as to absorb losses in a financial crisis.

Mr Hammond’s stance chimes with widespread industry fears that Brexit will fragment European financial markets, forcing banks to split up the pools of capital that they have concentrated in London to create efficiencies of scale.

As well as warning of French-led attempts by the EU to bind Britain’s financial services industry in red tape after Brexit, Mr Hammond also predicted steadily rising pressure from the bloc for the relocation of UK-based activities to member states, according to a note made by one of the participants at the 11 Downing Street meeting on July 16 that involved several of the sector’s representative bodies.

Rather than the number of jobs moving from the City because of Brexit, industry executives say the most strategically important question is where banks book their assets and have their capital, as this ultimately brings with it employment, investment and tax revenues.

“The concern that the City has is quite simple — they want the most efficient capital model possible,” said Jonathan Herbst, a partner at Norton Rose. “I think some of this gets lost in the European debate sometimes because, all you are doing if you force the banks to [move assets] is handing even more of an advantage to New York.” [...]

Full article on Financial Times (subscription required)



© Financial Times


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