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ECB warns of 'race to the bottom' in EU to attract London firms after Brexit

European Central Bank regulators warned March 27 that some EU states are engaging in a regulatory race to the bottom in order to attract U.K.-based firms looking to establish a foothold on the continent after Britain quits the union.

Two senior ECB officials said third-country branches and broker-dealer licenses could pose arbitrage opportunities for U.K. financial companies that wish to do business in the EU without being subject to tough supervision from the Frankfurt-based regulator.

"Third country branches are subject to banking supervision, but at a national level and according to national standards and national regimes. And these standards can greatly differ from one country to another. Some national supervisors, for instance, oblige third country branches to have capital and liquidity of their own, others do not," ECB Supervisory Board Vice Chair Sabine Lautenschläger told a press conference.

"All this runs counter to the idea of a level playing field in the euro area. It is an invitation to engage in regulatory and supervisory arbitrage."

Some EU countries are promising "fast delivery" of bank or broker-dealer licenses, she said, without requiring banks to establish risk management teams at a local level. By comparison, entities currently based in the U.K. that go via the ECB will take anywhere between a few months and two years to obtain accreditation to operate in the single market, Lautenschläger added.

As the rules stand, she said, investment banks may also sign up as broker-dealers in some EU jurisdictions and lend money without being regulated by the ECB.

"In Germany, for example, giving loans means you have to have a banking license and you are under banking supervision. In other countries, giving loans is outside of the banking supervisory scope. So you have a fragmentation in the supervisory landscape where you might have a race to the bottom," Lautenschläger said.

The ECB called for legislative action to stop countries disrupting EU regulation. The chair of the supervisory board at the ECB, Danièle Nouy, said "the obvious solution" would be a requirement for firms to establish ECB-supervised intermediate holding companies.

Ireland laid an official complaint with the European Commissioner for Financial Services on March 1 about Luxembourg undercutting other countries in the competition to attract U.K.-based businesses.

"We are hearing from various sources that companies are being offered certain incentives, that they are offering a back door to the single market without the requirement to have capital to back up their entities in the European Union," Eoghan Murphy, Ireland's financial services minister, told Reuters.

Luxembourg dismissed the accusations as unfounded.

British Prime Minister Theresa May is set to trigger Article 50 of the Lisbon Treaty on March 29, formally notifying other EU members of the U.K.'s intention to leave.