On 14 August 2019, the European Central Bank (ECB) published an article on its website calling on banks to step up their preparations for a no-deal Brexit at the end of October 2019.
The ECB asserts that banks have transferred significantly fewer activities, critical functions and staff to euro area entities than originally foreseen as part of their plans for Brexit. It expects banks to speed up the implementation of their plans to minimise execution risk.
The ECB states that it sees a risk that as a result of the delays banks will not be able to fully implement their target operating models within the timelines agreed with their supervisors. The ECB expects banks to follow up on agreed commitments, in particular regarding the build-up of local risk management capabilities and governance structures. If plans are only partially implemented, the ECB warns that this could have a negative impact on banks’ profitability.
The ECB also expects banks to be prepared for differences in the application of the prudential provisions in the Capital Requirements Regulation and Capital Requirements Directive IV once the UK becomes a third country.
With respect to the continuity of uncleared cross-border derivatives contracts, the ECB notes that the private sector has made some progress in addressing the risks associated with the existing stock of contracts. However, the ECB states that these measures are of a temporary nature and do not replicate passporting rights within the Single Market. As a result, the ECB is encouraging market participants, where necessary, to implement effective mitigating actions, including novations, as soon as possible.
Regarding access to third country financial market infrastructures (FMIs), the ECB states that banks in the euro area are expected to have sufficient onshore capacity (i.e. excluding group entities or branches in third countries) to originate business and access key FMIs on a continuous basis. Therefore the ECB is asking banks to consider which alternative FMIs would be available if their access to existing FMIs were impeded or the finality of their instruments/settlements could no longer be guaranteed.