EU member countries are offering looser regulatory standards to banks after Brexit, taking advantage of a gap in EU financial rules. The countries are competing to host the trading operations of London-based investment banks.
Even though they are some of the most complex and riskiest parts of their businesses, there is no control over the divisions of banks that conduct most of their market trading – broker-dealers by the European Central Bank despite it being the euro zone's banking supervisor due to EU laws.
This is because the bulk of broker-dealers were in London and therefore not under its purview before 2014, when the ECB became responsible for euro zone supervision.
Businesses approvals and supervision for banks looking to relocate these operations, would be conducted by the national markets regulator of whichever country they move to with relation to trading in continental securities after Britain leaves the EU.
Fears are being raised at the ECB that they could be subject to light touch supervision and undermining its aim of making financial regulation consistent across the bloc as countries hoping to lure banks to their financial centers after Brexit are offering differing regulatory standards.
This means that the prospect that some broker-dealers would take on more risks than other regulators would deem appropriate is being raised by such inconsistencies as they would be trading the same markets in Europe and could be subject to different regulatory requirements.
"Regardless of balance sheet size, it's currently the national regulators who will have the authority to approve and regulate the broker-dealers. That is raising concerns of inconsistencies emerging," said Vishal Vedi a partner at Deloitte who is advising banks on how they will need to reorganize as a result of Brexit.
Hoping to benefit from the tax revenues and jobs they would bring, the likes of Frankfurt, Dublin, Luxembourg and Madrid are vying to lure banks across the euro zone.
Regulation is one way to differentiate themselves.
The extent of "back-to-back" trading that would be allowed for the broker-dealers to conduct by the national regulators is one area in focus. One example of this is while the banks would process and risk manage the transactions at its London office, they would be buying European securities - out of its EU base.
Since much of the trading and risk could continue to be overseen in London, this would minimize the number of people a bank would have to move to Europe after Brexit. And with minimal amounts of capital held locally at the EU unit, supervisory control over the people and units that are conducting the trading and managing the risks would not be possible for the regulators in the country where the banks relocate as well as for the wider euro zone.
Bank executives say they are skeptical about whether they will be allowed to use workarounds like back-to-back in the long term and most banks - publicly at least - have yet to make a final decision on where they plan to set up their broker dealers after Brexit.
"We do suspect that following Brexit, there will be constant pressure by the EU not to 'outsource' services to the United Kingdom but to continue to move people and capabilities into EU subsidiaries," JPMorgan Chief Executive Jamie Dimon said in his annual letter to shareholders on Tuesday.
There could be changes to EU laws to bring broker-dealers under the ECB's supervision, said Sabine Lautenschlaeger, an ECB executive board member, while expressed her concerns on the issue in March.
"Needless to say that I would certainly not accept banks booking all exposures with the euro area entity while having their risk management and internal control systems outside the euro area," she said.
(Source:www.reuters.com)
Even though they are some of the most complex and riskiest parts of their businesses, there is no control over the divisions of banks that conduct most of their market trading – broker-dealers by the European Central Bank despite it being the euro zone's banking supervisor due to EU laws.
This is because the bulk of broker-dealers were in London and therefore not under its purview before 2014, when the ECB became responsible for euro zone supervision.
Businesses approvals and supervision for banks looking to relocate these operations, would be conducted by the national markets regulator of whichever country they move to with relation to trading in continental securities after Britain leaves the EU.
Fears are being raised at the ECB that they could be subject to light touch supervision and undermining its aim of making financial regulation consistent across the bloc as countries hoping to lure banks to their financial centers after Brexit are offering differing regulatory standards.
This means that the prospect that some broker-dealers would take on more risks than other regulators would deem appropriate is being raised by such inconsistencies as they would be trading the same markets in Europe and could be subject to different regulatory requirements.
"Regardless of balance sheet size, it's currently the national regulators who will have the authority to approve and regulate the broker-dealers. That is raising concerns of inconsistencies emerging," said Vishal Vedi a partner at Deloitte who is advising banks on how they will need to reorganize as a result of Brexit.
Hoping to benefit from the tax revenues and jobs they would bring, the likes of Frankfurt, Dublin, Luxembourg and Madrid are vying to lure banks across the euro zone.
Regulation is one way to differentiate themselves.
The extent of "back-to-back" trading that would be allowed for the broker-dealers to conduct by the national regulators is one area in focus. One example of this is while the banks would process and risk manage the transactions at its London office, they would be buying European securities - out of its EU base.
Since much of the trading and risk could continue to be overseen in London, this would minimize the number of people a bank would have to move to Europe after Brexit. And with minimal amounts of capital held locally at the EU unit, supervisory control over the people and units that are conducting the trading and managing the risks would not be possible for the regulators in the country where the banks relocate as well as for the wider euro zone.
Bank executives say they are skeptical about whether they will be allowed to use workarounds like back-to-back in the long term and most banks - publicly at least - have yet to make a final decision on where they plan to set up their broker dealers after Brexit.
"We do suspect that following Brexit, there will be constant pressure by the EU not to 'outsource' services to the United Kingdom but to continue to move people and capabilities into EU subsidiaries," JPMorgan Chief Executive Jamie Dimon said in his annual letter to shareholders on Tuesday.
There could be changes to EU laws to bring broker-dealers under the ECB's supervision, said Sabine Lautenschlaeger, an ECB executive board member, while expressed her concerns on the issue in March.
"Needless to say that I would certainly not accept banks booking all exposures with the euro area entity while having their risk management and internal control systems outside the euro area," she said.
(Source:www.reuters.com)