Some supervisory expectations for banks relocating to the euro area

Introductory remarks by Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB,
Technical workshop for banks considering relocation in the context of Brexit, Frankfurt am Main, 4 May 2017

Ladies and gentlemen,

First of all, let me welcome you to the premises of the ECB.

I am pleased to see that representatives of so many banks are attending today’s workshop. We plan to discuss a topic which will not only be of importance for your business activities within the euro area, but will also require significant and highly efficient planning efforts as well as resources from you as banks but also from us as supervisors. To see you gives me some comfort that you are speeding up the preparations for “Brexit”.

Now, what do we want to achieve today? What is the goal of this workshop? Well, several banks have approached the ECB and our colleagues at the national authorities with questions on our supervisory approach for incoming banks. Today, we want to answer some of these questions. We will give you an idea of how we conduct supervision, how authorities in the euro area work together and how key processes like the Supervisory Review and Evaluation Process – or SREP – work.

And we will inform you about what we generally expect from banks that operate in the euro area – regardless of whether they are already here, plan to set up a new bank or want to transfer business.

And to be clear: these expectations are valid in all countries of the euro area. We do not care whether banks go to Dublin, Paris, Rome or Frankfurt.

What we care about is that banks across the euro area are supervised according to the same standards. Ensuring that these standards are met is one of our core tasks and we can answer your questions on those standards. I am sure, however, that there are some questions in your mind that we will not be able to answer today. For example, the developments concerning the intermediate parent undertaking (IPU) may be very relevant for you, but it is not us who control these as the CRR/CRD review is in the hands of the European legislator.

About a month ago, the British Government triggered Article 50 of the Treaty on European Union. Brexit has officially started. But where it will end, we do not know. The outcome of the negotiations is very much unclear at this point in time. The only certainty is that Brexit will have an impact on the EU and the UK and it will have an impact on the financial sector in particular.

I think all of you who are here today are well aware of what the uncertainty around Brexit requires: it requires preparing prudently, considering that in less than two years’ time, the UK might become a third country from the viewpoint of the EU. That could change the access of UK-based banks to the Single Market. But it is not only those banks that have to prepare: banks based in the EU also need to make up their minds on how to react to Brexit. We do not know whether there might be transitional arrangements to ease the time pressure and allow for a smooth transition; therefore: preparing for the worst is the prudent practice to use.

We have done our homework in that regard. Together with the national authorities, we have laid out how we will approach Brexit from the supervisory side. The most important message is that we will stick to our standards. We will resist any supervisory or regulatory race to the bottom. All banks in the euro area have to meet our standards – no matter whether they come from the UK or any other place.

First of all, we will not accept shell companies. Any bank that operates in the euro area must be a “real” bank. And a “real” bank has adequate local risk management, sufficient local staff and operational independence. A “real” bank also does not permanently book all of its exposures back-to-back with another entity in the group; this would make it way too reliant and limit control over its own balance sheet.

We will, in the future, scrutinise very carefully large intragroup exposures that support such back-to-back schemes. We will look at the specifics of the case before the exposure to a third-country entity is incurred, in order to make sure that there are no prudential concerns. That will not result in a general rejection of any large intragroup exposures, but the ex-ante monitoring will give us comfort with regard to relevant risks potentially emerging; it will not only inform our assessment about the needed intensity of supervisory cooperation, it will also help us in the recovery and resolution assessment, as well as enable us to act on outliers.

But if all of this is standard, then what is special about our approach towards Brexit? Well, what we did was to first identify the most crucial issues for those banks that want to relocate to the euro area. In a second step, we then set high-level principles on how to address these issues. Among other things, we covered licensing, internal models and risk management.

In practical terms, the first step for any bank that wants to relocate to the euro area is to obtain a licence. Granting licences is a joint effort of the national supervisor in the country where the bank wants to establish itself and the ECB, which takes the final decision. The whole process is based on existing law, which continues to apply, of course.

From the moment a bank hands in a complete application for a licence, it usually takes between six and twelve months before the process is finished. Against that backdrop, 29 March 2019 is closer than it appears. Still, the time it takes depends on many things: what is the quality of the application? And how well prepared is the applicant? So we urge you to approach the ECB or the national supervisors as early as possible. At the same time, we will work hard to give you timely feedback on your applications.

Another crucial question for banks that want to relocate is whether they can continue to use their internal models. We are aware that banks would like us to simply grandfather existing model approvals that were given by the British supervisor. We will not do that. It is not feasible from a legal point of view, and it would not be the most prudent thing to do. Internal models need to be approved by the relevant supervisor, also to meet the obligation for equal treatment; therefore, banks that relocate to the euro area would have to seek a new permission from us.

But we are aware that time is short and that it can take a while until an internal model is approved. Thus, there will be a limited period of time in which banks might be allowed to use internal models that have not yet been approved by the ECB – subject to strict conditions, of course, which will be assessed on a case-by-case basis.

One of these conditions is that the bank has filed a complete and high-quality application for model approval in the euro area. It is obvious that the relevant model should continue to be applied to the portfolios it was approved for by the British supervisor. Here, we will carefully consider any comments from the British authorities. This would allow us to build on the work they have already done, continuing our good cooperation post-Brexit.

Now, all of what I just said applies to banks that seek a licence in the euro area. However, some banks might choose other paths into the Single Market. For example, some banks may choose to undertake significant activities through third-country branches or investment firms. Such legal structures are currently outside the scope of European banking supervision. They are supervised at the national level. And here, standards can be very different from one country to another.

Do I see a risk in such a fragmented approach? Yes, I do. Is there a chance to address this? Yes, there is. The current revision of the CRR and CRD is an opportunity to tackle fragmented regulation and ensure that banking supervisors can have a holistic view of all activities within a banking group. Consolidating the EU presence of banks within an intermediate parent undertaking would ensure that interconnectedness of risks and operational interdependencies become transparent. And we might even look further: major jurisdictions like the UK and the US have the possibility to bring systemic investment firms under the scope of the banking supervisor – something which is not yet available in the euro area.

Until then we will keep a close eye on this issue, using the tools at our disposal. This includes, for example, rules on large intragroup exposures within the group for many of our jurisdictions, but it also extends to the broader picture we see when looking at it from a financial stability perspective.

So what is it that you should take away from today’s workshop?

First, the ECB ensures that banks across the euro area are supervised according to the same high standards. And we will stick to these standards. Still, we are open to working with banks in order to enable a smooth transition.

But at the end of the day, it is you – the banks – who have to act. You have to apply for a licence. You have to put in place sound governance and risk management. You have to hire qualified staff. Viewed from today, March 2019 seems to be far in the future. But we all know that time flies, and that there is a lot of work ahead of us. We had better get started.

Thank you for your kind attention.

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