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Prepare for hard Brexit, ECB warns banks

Banks should be prepared for the U.K. to leave the EU without a transitional agreement in place to maintain access to the single market, Europe's top banking regulators warned Feb. 7.

Sabine Lautenschläger, vice chair of the European Central Bank's supervisory board, said any U.K.-based bank hoping to relocate operations to the eurozone after Brexit "should really have submitted its license application already." Those that have not should file before the end of the second quarter, she added, speaking at a Feb. 7 press conference in Frankfurt.

SNL Image

From left, Sabine Lautenschläger, vice chair of the ECB supervisory board; Danièle Nouy, chair of the board; and Conny Lotze, deputy director general of communications at the ECB, appear at a press conference Feb. 7 in Frankfurt.
Source: ECB

"Banks must be ready for Brexit — it will happen even if the EU and the U.K. have agreed to discuss a possible transition period," Lautenschläger said. "Still, we cannot be sure whether a transition period will really happen. Thus our expectations have not changed: banks must continue to prepare for any outcome, including a hard Brexit."

The U.K. and the EU clinched a "divorce deal" in December 2017 and are working to agree on provisions to smooth Britain's departure from the bloc in March 2019. Negotiators will meet in the week beginning Feb. 12, and the EU said in a paper released Feb. 7 that it wanted the power to suspend some benefits during the transition if the U.K. does not keep its side of the bargain.

The main criteria the ECB requires banks to fulfill to receive a new or expanded license are "full control of balance sheet risk" within the EU, as well as having a clear "resolvability" structure in case they fail, the regulator said. Pricing, trading, risk management and hedging functions should be based in the EU as well, she said.

Eight banks have submitted applications already, while four others are looking to "significantly" expand their activities in the EU, according to Lautenschläger. Discussions at various stages are underway with a total of about 50 firms, she said.

Lautenschläger also expressed satisfaction with the assurances given by the U.K.'s Prudential Regulation Authority to continental banks that they may continue their British operations unencumbered after Brexit.

Meanwhile, the ECB's updated plans for how it will tackle the bloc's pile of nonperforming loans are likely to be published in the middle of March, said Danièle Nouy, the head of the ECB's supervisory committee. The draft version of this project, known as the addendum, has drawn intense criticism from Italian banks and politicians in particular for suggesting it might force banks to hold more capital against their stocks of nonperforming loans, or NPLs.

Nouy said a public consultation on the proposals drew almost 500 comments from 36 counterparties. The rules had been due to go into force Jan. 1, but will now take effect no sooner than the start of the month after they are published, potentially April 1, she added.

The revised version "will also make it even clearer" that the ECB intends to work with banks on a case-by-case basis. EU banks had €760 billion in NPLs at the end of September 2017.

"Banks should use good times to reduce NPLs. And the good times are now," Nouy said. "Carrying over the residual problems of the crisis to the new downturn is not a viable option. Once a downturn sets in, it will become much harder for banks to get rid of NPLs."

The ECB is directly responsible for supervising 119 banks in the eurozone, which collectively represent almost 82% of banking assets in the bloc. The remainder are supervised by national authorities in cooperation with the ECB.