European powers, and especially France, are seeking to gain at Britain's expense by the uncertainty created by Brexit over future banking regulations, including those on "back-to-back" trading, according to the U.K.'s City minister.
Back-to-back trading allows banks to agree deals in EU countries but process them in London. EU regulators fear banks will open "brass plate" offices with little or no staff presence or risk management facilities across Europe after Britain leave the bloc, but will continue to book business in the U.K.
Lord Butler, a former private cabinet secretary in governments during the 1980s and 1990s, said the European Central Bank had recently told U.K. banks they had until 2022 — just three years after Brexit in March 2019 — to curtail their use of back-to-back trading. This, said Butler, amounted to a "hostile statement" from the regulator designed to make it more difficult for banks to keep their operations in London after Brexit.
He was questioning U.K. City Minister and Economic Secretary to the Treasury John Glen as he appeared before the House of Lords EU Financial Affairs committee.
The continued use of back-to-back trading after Brexit is one of the key reasons why U.K. firms expect to have to move fewer than 5,000 roles — the equivalent of less than 6% of their U.K. work force — to the EU after the U.K. quits the bloc.
Glen said such moves from the ECB were in the context of the final stages of a negotiation where opponents would seek as much leverage as possible.
"We are in a dynamic negotiation where the French, in particular, have sought to leverage as much advantage as possible through this uncertainty," he said. "The market's view is that [Paris] is not a realistic alternative to London in any sense, nor is Frankfurt, nor is Luxembourg, nor is Dublin."
He said the bottom line is that economic realities, and the need to access as cost effectively as possible the City of London's institutions and capital markets, remain for the Italians, the Germans and the French.
"They will need to come to terms with that in the end," he said.
Butler asked Glen if he was concerned that it was the ECB, the "technicians," who were making these demands rather than the French or German governments.
"They are technicians within a jurisdiction which isn't our own," he said. "I am not seeking to attribute any proactive politicization to the ECB, but what I am saying is they act in response to the direction given to them. Therefore it is not surprising — given that we haven't resolved what the deal is — that they would seek to reflect the sentiments of the political leaders which have most leverage over them, notably the French and possibly the Germans."
The 'backbone' of international finance
According to consultancy Oliver Wyman, the U.K.'s exit from the EU could end up costing banks as much as $50 billion in capital costs to support new subsidiaries.
Andrea Enria, the chairman of the European Banking Authority, has said back-to-back trading is the "backbone" of international finance. While the EBA said such trading post-Brexit is possible, it stressed that it must not lead to "empty shell" subsidiaries — and noted this was a point approved by its board of supervisors which includes the ECB.
"Counterparty credit risk needs to be managed at subsidiary level, while market risk can be centralized at the parent company level, but the subsidiary must retain its risk management capacity in order to have a 'scale-up' capacity in case of a crisis," said a spokesman for the EBA.
The ECB's latest move comes after banks put forward numerous proposals to the regulator on the terms under which they could continue back-to-back trading post-Brexit.
Leading bankers giving evidence to the U.K.'s Treasury Select Committee last month were confident that conversations with European regulators would lead to a pragmatic solution.
Kevin Wall, CEO of Barclays Ireland, told MPs that a number of potential outcomes were under discussion.
"The models that we will all employ will be a mixture of back-to-back to parent, with some element of containing the risk in the entity itself and then some risk allocation to the rest of the market," he said. "That is a pragmatic destination."