On 9 July 2020, the European Central Bank (ECB) issued a blog stating that banks must prepare for the end of the transition period.
At the start of the blog the ECB warns banks that the relief measures that have been put in place to support the economy during the COVID-19 pandemic do not extend to essential end-of-year Brexit preparations. The ECB states that the question for banks is how the pandemic might affect them, both in terms of the business environment and their operational set-up, as they approach the end of the transition period. The ECB adds that if anything, the impact of not being prepared will be greater now, in the COVID-19 context, as banks may be weaker and are operating in a more fragile environment.
The ECB reports it has recently reassessed banks’ preparedness for the end of the transition period. ECB supervisory teams have discussed with banks their progress towards the post-Brexit target operating models to which they have committed. The ECB states that it is now crucial that banks focus on filling the gaps and progressing towards their target operating models.
The ECB refers to the European Commission’s announcement regarding the temporary equivalence of UK central counterparties stating that the temporary equivalence that might be granted responds to the industry’s demand for more time to adjust clearing operations to the UK’s new status as a third country. The ECB adds that it “remains critical for the industry to continue these actions in order to avoid possible new cliff-edge risks at a later stage. Where equivalence is time-limited, the cliff is still there. It is simply further away.”
The ECB expects banks to soon reach their end-state target operating models. The qualitative dimension will remain a cornerstone of ECB supervisory teams’ assessment. The ECB warns that banks that have failed to hire staff with sufficient seniority and skills’, neglected to make necessary transfers of material assets, or unduly split trading desks across multiple legal entities, will not be considered as complying with its requirements. The ECB adds that “not addressing this qualitative dimension means operating as (half-) empty shells – something that the ECB will not accept.”