The gradual push towards Brexit in March 2019 has continued, though the transitionary plans from banking institutions may not be as seamless as originally thought. On the contrary, the level of planning less with less than twelve months to go appears as ‘inadequate,’ citing a recent warning from the European Banking Authority.
The road to this point even has been anything but fluid, with banks operating in the UK ultimately being prompted a year ago by the Bank of England to disclose all plans ahead of Brexit. This led to a groundswell of activity in shifting operational focus to within the bloc, most commonly gravitating towards Frankfurt and Dublin. By extension, Amsterdam, Paris, and other cities each saw banks pursuing licenses.
Prospect of hard Brexit looms
The shift of bases of operations into the EU ahead of Brexit seems fairly straightforward, especially in light of the back and forth signals over the past few years from the UK. Banks were initially turned off by the wavering stance towards passporting rights, which helped kindle an exodus out of the UK. According to an FT report, however, this process may be lagging well behind.
Indeed, the EU’s top banking regulator strikes a much harsher tone than other UK supervisors, who have largely towed a more optimistic stance. A recent warning suggested planning that is woefully unprepared for a hard Brexit, which could yield severe consequences for the industry if true.
In addition, the authority also warned that UK assets could potentially carry higher capital charges once the UK leaves the EU. If true, this would dramatically increase the pressure facing lenders to shift more operations out of Britain before Brexit next March. Any acceleration of this process with less than twelve months till Brexit could also run into the issue of timing.
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Its all about the preparation
Banks have been pursuing licenses for more than a year. Furthermore, lenders have been vying for other finite resources as well, including personnel, and in the case of Frankfurt, office space. Perhaps the most noteworthy effect of the warning is the staunch contrast it paints to that of UK officials themselves.
The Bank of England has been a proponent of a smooth Brexit, citing a transition period that will last until 2020. Other recent studies have also downplayed the significance of Brexit, while still seeing London as a paramount financial hub even in the direst of circumstances or departures.
However, the European Banking Authority warned that banks could not rely on a transitional agreement past March 2019, not leaving the window open for the aforementioned transition period. Consequently, the authority believes that the financial stability of these institutions should not be put at risk given banks are trying to cut costs.
According to a statement from the EU authority: “The time for the required actions to be taken is reducing. Financial institutions should not rely on public sector solutions, as they may not be proposed and/or agreed. The recent political agreement on a transition period, while welcome, does not provide any legal certainty.”
Moving forward, such assessments could have lasting effects. For example, in one scenario, banks could have their capital requirements increased for certain UK exposures. Time will tell whether the European Banking Authority’s stance was too gloomy, though many lenders have not waited around to find out.