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Britain’s EU departure in 2019 “certainly won’t be a piece of cake” and given that five rounds of divorce talks have not made enough progress, regulators must assume a “cliff edge situation”, Felix Hufeld, president of BaFin, said.
“It’s crystal clear in my mind that whatever the outcome of Brexit, it will cost a price both for British and EU27 consumers. The cost of doing business will go up,” Hufeld said.
Regulators will need temporary solutions to avoid dangerous “distortions” in markets while entering the post-Brexit world, Hufeld said at an event in London. [...]
New hubs being set up by UK-based lenders must not be empty shells, Hufeld said. Some “20ish” banks have applied for licences – all in Frankfurt, with one small insurer in Munich – but none have been approved so far.
“Banks that are planning a comprehensive division of work between offices in London and the EU need to transplant and split up their entire ecosystem established over the years – that means IT infrastructures, knowledge, processes and people.”
To avoid disruption, they will be allowed to continue using capital models approved by UK regulators “for a limited time period”.
Banks that want to save costs by managing in London risks from trades undertaken at new EU hubs, known as back-to-back, must have “adequately” trained risk management staff in case this model is no longer possible.
There was also a need to find the right balance for outsourcing hub activities to London, he added.
“What is not allowed is for the subsidiary in the EU not to have an adequate control system on-site, and to therefore be dependent on the sister or parent company in London in order to fulfil the necessary control functions,” Hufeld said.
German Chancellor Angela Merkel wants a fair deal to help keep Britain in the European Union that avoids giving Britain’s financial sector an advantage over the eurozone
Germany’s Deutsche Bank is among the branches of EU banks in London that may have to become a subsidiary, a costly exercise, but Hufeld said this was not the only solution and pointed to the trust between UK and EU supervisors. [...]
Hufeld said Britain and the EU27 need to be aware of the implications of Brexit measures on the United States and Asia.
“If we screw up, then maybe others will pick up the bits and pieces and both the UK and EU are paying the bill, which I would hate to see happening. Let’s just be prudent,” Hufeld said. [...]