The European Central Bank (ECB) has published an article entitled Brexit: an ECB supervision perspective. In its article, the ECB states that elements of certain banks’ plans do not meet the ECB’s expectations or the requirements for banks operating in the euro area. Key points in the article include:

  • with regard to risk management, the ECB notes that some banks indicated their wish to transfer all market risk to a third-country group entity. In terms of supervision, the ECB notes that it is not comfortable with this approach, as this could create risks in crisis situations where local capabilities may be crucial to continue operations. This is the key reason why the ECB and Member State national supervisors expect banks, at least over the medium term, to manage part of their risks locally and not to be fully reliant on back-to-back transactions of this type;
  • for market risk, this means having permanent local trading capabilities and local risk committees. It also means actually trading and hedging risks with diversified counterparties and not just the group;
  • with regard to staffing of banks, the ECB has noticed that several banks’ plans include references to dual-hatting, a practice where the staff carry out functions in more than one group entity. The ECB states that such plans need to be thoroughly assessed as they may limit independence, create conflicts of interest and result in insufficient time being available for each function. The ECB believes that its concerns would be even greater if employees of a euro area bank were seen to be spending most of their working time in a third country and not, therefore, being physically present in the euro area. In general, the ECB expects control functions and local governance to be sufficiently independent and banks to have staff in place locally; and
  • the ECB notes that transitional arrangements for specific aspects may be agreed upon with supervisors, however certain elements will need to be in place from day one, such as the risk management function. In the event of transitional arrangements being agreed on upon with the ECB and/or Member State national supervisors, banks should set out clearly what the steady state will be, commit to this and explain how and when they will get there. So far, the ECB notes that this expectation has not been adequately reflected in banks’ proposals.

View ECB criticises UK banks’ relocation plans, 15 November 2017