Andreas Dombret, a board member at Deutsche Bundesbank, Germany’s central bank, tells Stefanie Linhardt about the consequences of a no-deal Brexit, and what banks looking to relocate from the UK to Germany should expect.

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. The impact on the financial sector, with concerns over EU market access for British banks, could be significant. What is the German perspective on this?

A: First of all, I welcome the fact that the prime minister also announced that the UK wants to maintain close co-operation 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 UK 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?

A: 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 got in touch with us early on in order to explore the 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. 

Q: In a recent speech, you said halfway approaches and ‘letterbox companies’ set up to operate as banks’ businesses in Germany would not be sufficient and 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?

A: 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 supervisory board of the European Central Bank [ECB] being responsible for the supervision of what is 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 halfway approaches such as ‘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?

A: 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.

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


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