Deutsche could eventually move about three-quarters of its estimated €600bn balance sheet back home.
Any transfer of the German bank’s assets, equivalent to almost half the total held by European lenders in the UK, would be a big blow to the City of London, which has seen overseas banks move operations to mainland Europe amid the uncertainty of Britain leaving the EU.
The European Central Bank, the chief watchdog of the eurozone’s largest lenders, has insisted that Deutsche bulk up its capital and liquidity in Germany to comply with rules for branches in a “third country”, which the UK will become when it leaves the EU in March.
Its demands are becoming so onerous that it is increasingly likely that Deutsche will transform its UK arm into a ringfenced subsidiary after Brexit, say people familiar with the thinking of the bank’s executives.
The initial impact on Deutsche’s headcount in London should be modest, but there are more serious long-term implications of the flight of capital from the City, such as the ECB gaining more regulatory control of banks.
A spokesperson for Deutsche Bank said: “We announced last year that we would make Frankfurt rather than London the primary booking hub for our investment banking clients. By definition this involves moving assets from London to Frankfurt, a process which is already under way with the full understanding of UK and EU regulators.
“The terms on which banks will operate in the EU and UK after Brexit remains unclear in the absence of a firm political agreement but our intention is to operate in the UK as a branch in line with the [Prudential Regulation Authority] guidance.”
The ECB’s main concern is that too many of Deutsche’s global investment banking operations would remain in the UK after Brexit without sufficient oversight from either European or British regulators, the people said. Officials would be more assured by a subsidiary structure because it would ensure closer adherence to local rules, as well as providing better corporate governance, for example by a new independent board.
ECB supervisors have told Deutsche’s top executives that a UK branch should be limited to serving corporates and retail customers in the host country, rather than exporting investment banking services across the globe, one of the people said. The central bank has in the past expressed concern that banks will use third-country branches to take advantage of laxer supervision in some jurisdictions.
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