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27 March 2020
What scenarios does the ECB envisage in order to prepare euro area banks for the end of the transition period?
The ECB cannot comment on the agreement that is currently being negotiated between the European Union and the United Kingdom. However, we can mention two hard facts:
Supposing there is no equivalence, what consequences would that have for European banks and are they prepared for them?
This Brexit scenario without equivalence corresponds exactly to the one we have been working on with the banks for the past two years now and which was initially referred to as a hard Brexit. It would be a hard Brexit deferred to the end of the transition period.
The banks have submitted to us their plans for managing this possible hard Brexit. And the ECB has already said that it thinks that the banks are in a position to manage the risks. We are using the time we have left (up to the end of 2020) to ensure that these plans are actually implemented properly.
Have banks been waiting until the very last minute to adapt to a possible hard Brexit, for fear of taking costly decisions that may prove unnecessary?
Banks are indeed trying to minimise their costs, but we are pushing them to step up their preparations. Levels of preparedness may, of course, differ across banks. So we are now monitoring each bank to ensure that they are all well prepared.
Will non-European banks that access the European market after the transition period through EU-based subsidiaries need to ensure that these subsidiaries are not empty shells?
There is no risk whatsoever that empty shells will be set up in the euro area. We set out our policy in a document published in August 2018 and the rule is very simple: all activities related to European products or to European customers must be managed and controlled from entities located in the EU.
The ECB will never authorise empty shells in the euro area: a bank subsidiary located in the euro area must carry out genuine activity in terms of risk management, control and governance. The European Banking Authority has adopted a similar policy to ours towards non-euro area EU countries and the European Securities and Markets Authority, which supervises market activities, takes the same view.
Rather than setting up a subsidiary, could a non-European bank choose to set up one or more branches in the EU in order to gain access to customers located in the EU, as a form of regulatory arbitrage?
If, say, a US or UK bank sets up a subsidiary in a euro area country, that subsidiary will have to be authorised by the ECB. In the case of a branch, however, authorisation is granted by the national supervisor, which is the sole competent authority for exercising supervision. This branch will only be entitled to conduct business in the country where it has been granted authorisation. But a bank can set up 27 branches in the 27 countries of the EU and thus conduct business in the EU that is only governed by the national laws of those 27 countries. So there is a possibility of regulatory arbitrage between, on the one hand, ECB supervision when establishing a subsidiary and, on the other, national supervision when establishing a branch. This situation is unfortunate and should prompt Europeans to put mechanisms in place that would at least ensure greater harmonisation in exercising these national competencies, or even centralisation, something that had not been envisaged when the banking union was being created.
What would an equivalence regime mean for non-European banks?
Equivalence would enable banks located outside the euro area to conduct business in the euro area, to an extent that, however, depends on their field of activity. For classical banking activities, such as taking deposits and granting loans, equivalence would not bring many changes. However, an equivalence regime could have consequences for the provision of investment services: in this area, non-European banks operating from the United Kingdom could offer a limited number of services to customers established in the euro area, services which they would not be able to offer without equivalence. That is why the discussions now being led by the European Commission on the conditions to be attached to this equivalence are so important. For the banks under its supervision, it is worth recalling that the ECB released its policy in the summer of 2018 and has been applying that policy since then: all of the activities related to European products or to European customers must be managed and controlled from the euro area, within the banks’ European entities.