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Ex-central banker Dombret: Transition period makes no sense in no-deal Brexit

It does not make sense for the EU to agree to a two-year Brexit transition period if no withdrawal agreement is reached with the U.K., former Bundesbank executive Andreas Dombret said Oct. 16.

Without an agreement on future relations after Britain leaves the bloc, scheduled for March 29, 2019, it would not be clear where both sides would be transitioning to, said Dombret, who formerly headed bank supervision at the German central bank. This makes banks' no-deal contingency plans even more relevant at this late stage of the talks, he said.

"Hard Brexit is becoming a much higher probability, unfortunately," he said.

Realistic timeframe

"Without agreeing where you want to go, setting a time is just moving the cliff edge on without knowing what the cliff actually looks like," Dombret said at an event organized by financial services sector consultancy Zeb in London.

Having clarity on all issues beforehand is essential for a smooth transition and would also help determine a realistic timeframe to implement all changes that might come along with a Brexit deal, according to Dombret.

"If we know where we want to go, then we can decide on the time ... and not the other way around," he said.

All banks should have contingency plans for a no-deal Brexit and should also take into account the possibility of no transition period as well, Dombret said.

U.K. regulators have also urged banks to complete their contingency plans as the likelihood of a disorderly Brexit has increased in recent weeks. Hard Brexit concerns spiked after the EU and Britain failed to hammer out a deal on future border arrangements between Northern Ireland, which is part of the U.K., and Ireland, which is in the EU.

The two sides were expected to announce a final Brexit agreement in a Brussels summit on Oct. 17, but chances for that now look slim.

A key barrier to the financial services sector, in particular, is the lack of clarity on future rules for derivatives clearing, which now is concentrated in the U.K., Dombret noted. This is causing hesitation among banks that already have contingency plans.

Banks "are preparing but they are not committing" because they want to see the final outcome of the negotiations before they move people or operations to continental Europe, according to Dombret.

No systemic risks

He also rejected a recent statement by the Bank of England saying that the EU has not done enough to mitigate the risks arising from a potential no-deal Brexit or a lack of transition period.

"I was astonished to read that," Dombret said. "From a European point of view, there is nobody who wants this project to fail."

He said there were constant talks between the BoE and the German regulators during his time at the Bundesbank.

The BoE's Financial Policy Committee warned of potential systemic risks because of "limited progress" made by the EU and said there has been "considerable progress" in Britain.

The U.K. government has set up the so-called temporary permissions regime which will be invoked in case of a no-deal Brexit and will ensure the temporary continuation of business for all financial firms and funds from the European Economic Area in the U.K. until they obtain new authorization by the local authorities.

Brexit has been an expected event for a long time, banks have been preparing for it and regulators have kept a close eye especially on big banks, so it is hard to see any risks to the whole financial system, Dombret said.