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ViewpointMarch 28 2017

Andreas Dombret: the German view of Brexit

Andreas Dombret, member of the board at Deutsche Bundesbank, Germany's central bank, tells Stefanie Linhardt about the issues banks thinking of re-locating to Germany would have to consider, the negative consequences lower standards of regulation could bring for financial markets and the risks of a 'no deal' Brexit.
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andreas dombret WEB

Q There was a lot of uncertainty over the UK’s Brexit plans until UK prime minister Theresa May’s Lancaster House speech in January, which pointed to a hard exit from the EU. Impact on the financial sector, with concerns over EU market access for British banks, could be significant. What is the German perspective on all of this?

First of all, I welcome the fact that the prime minister also announced that Britain wants to maintain close cooperation and the most frictionless trade in goods and services possible with the EU. However, a hard exit clearly would affect market access. This is all the more true since it will be challenging to agree on both a 'divorce' contract and a comprehensive free trade arrangement within two years.

Financial institutions and other businesses are likely to take the prime minister’s words at face value and make the preparations necessary to retain market access. Moreover, they will factor in the strong political component of the talks. We cannot count on economic rationality being the only guiding principle during negotiations. And this means that we could even see a 'no deal' outcome, even though this would most probably hurt economic activity considerably on both sides of the Channel.

Q You specifically, and the Bundesbank generally, are overseeing banks in Germany. There has been a lot of speculation about the relocation of operations from British banks to other jurisdictions remaining within the EU. From your perspective, what would UK banks seeking to move some of their businesses to Germany have to consider?

All banks, not only those domiciled in the UK but also the ones domiciled in the EU27, should carefully assess how Brexit may impact their business model, location strategy and all of their internal and external processes.

German supervisors will contribute to a smooth transition by following a pragmatic approach in line with our mandate and rules. Banks seeking to relocate business units have gotten in touch with us early on in order to explore supervisory and regulatory consequences of Brexit for their businesses. Relevant issues under discussion include licensing, internal governance, risk management and outsourcing, to name just a few. The Bundesbank has set up a telephone and e-mail hotline for banks considering relocating to Germany. You can find the contact details on our website.

Q In a recent speech you said half-way approaches and ‘letterbox companies’ set up to operate as UK banks’ businesses in Germany would not be sufficient and that there would be a need for any branch to retain chief responsibility for its business. This could come at a significant cost for banks. Is the approach consistent across EU countries?

EU banking rules are based on the Capital Requirements Regulation and the respective Directive. They form a comprehensive and harmonised regulatory framework for banking business in the EU. And there is even greater harmonisation among countries that are part of the Single Supervisory Mechanism (SSM), with the ECB’s Supervisory Board being responsible for the supervision of currently more than 3300 banks. Within the SSM of the ECB, a consistent approach will be applied when it comes to dealing with the supervisory aspects of Brexit – regardless of whether these concern significant or less significant institutions. Among other things, this means that no SSM member state will tolerate credit institutions that are actually letterbox companies, nor will anyone accept half-way approaches like 'fly-and-drive banking' or 'dual hatting'.

While we insist all banks meet our standards, we are prepared to be accommodating regarding timing with respect to internal models. As the ECB announced recently, temporarily and under certain conditions new euro area entities might use internal models that have not yet been approved by the ECB. Of course, banks must have applied for internal model approval in the euro area and the respective models must have been already approved by the UK’s Prudential Regulation Authority. I guess it is needless to say that we will reflect on any comments on the quality of the models from our UK colleagues. Connivance will cease as soon as we have approved or rejected the bank’s model application.

Q How strong is the competition between EU financial centres for UK banks’ business and personnel moves?

Brexit is an opportunity for member countries to give their respective financial centres a boost. It is therefore no surprise that we are seeing some competition among European cities – and in some cases this is happening with various forms of backing from domestic public authorities. This is not a bad thing per se, as competition is helpful in fostering efficiency.

What matters to me as a supervisor is that banks are supervised according to high and consistent standards. This means that supervisory dumping, where authorities consciously downplay risks in order to attract businesses, must remain off the table and as the Bundesbank, we will not participate in that dumping. I strongly believe a successful financial centre needs tough and transparent rules.

Q You are a staunch supporter of the need for proper regulation and supervision of the financial sector. With president Donald Trump in the US seeking to end cooperation on financial market regulation and Brexit potentially also watering down rules, how concerned are you that this might have an impact on standards?

It is true that some voices in the UK have called for a financial centre strategy comprised of low corporate taxes and lax regulation as a fallback option for London. With respect to the US, we currently have too little information and I will not speculate. We should give the new US administration enough time to develop its position. That being said, I want to remind everyone that strong and harmonised rules are in the interest of every country. In the long term, well-capitalised and strictly supervised banks are the most successful ones and also those best able to support global economic growth. Therefore, we must prevent a regulatory race to the bottom.

Andreas Dombret is a member of the board of Deutsche Bundesbank, Germany’s central bank.

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