Brexit: time to move to post-Brexit business models

Brexit: time to move to post-Brexit business models

Banks now have clarity on the way forward. EU law will cease to apply within and to the United Kingdom at the end of 2020, when the transition period comes to an end. From 1 January 2021, UK‑based banks will lose their EU passport for financial services and EU banks will no longer be able to provide services in the United Kingdom through the EU passporting system.

Banks must now accelerate and complete the implementation of their post-Brexit target operating models as agreed with their supervisors and – in some cases – as set out in their SREP decisions. While a number of banks are moving in the right direction, some still need to take substantial action to trade, book and manage risk in the EU and to adequately adjust governance, in line with the ECB’s Supervisory expectations on booking models.

It is also necessary for banks to adhere to agreed timelines in order to continue using internal models which were previously approved by the United Kingdom’s Prudential Regulation Authority but which will now need to be approved by ECB Banking Supervision. Banks may continue to use these PRA-approved models during a transitional period until 30 June 2022, provided that they complete relevant transfers of activity to the EU in a timely manner.

Banks’ future operating models are based on the Single Market framework. Temporary exceptions merely help to avoid cliff-edge risk. Going forward, EU banks will not be able to rely on reverse solicitation (or other set-ups with the same effect), where their UK branches would continue to serve EU clients from the United Kingdom. The purpose of branches in third countries is to meet local needs, not to perform critical functions for the bank itself or provide services to EU‑based customers (which would expose the bank to undue risk management challenges). EU products and transactions with EU clients should be booked onshore – i.e. within the EU – with adequate onshore risk management capabilities (first and second lines of defence). Associated risks should be hedged with a diverse set of counterparties.

Where banks are required to build up risk management capabilities and related infrastructure (IT, finance and operations) in the 27 EU Member States, the qualitative dimension is important. For instance, banks should not merely transfer a certain number of employees. Instead, they should focus on transferring staff with the appropriate levels of seniority and skills. Moreover, banks should book and risk-manage EU products locally, without creating undue complexity in their booking models. For example, EU government securities should be identified as an EU product and risk-managed within the EU. Splitting a trading desk across multiple legal entities according to a specific product risk characteristic (for instance, according to maturity) would not be an acceptable practice, as it would create increased and undue complexity. ECB Banking Supervision will continue to engage with all affected banks to ensure that these principles underpinning the target operating models to which they have committed are applied consistently and in a timely manner, with due regard for proportionality.

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