Setting Up in Euro Area After Brexit? Do It Right, ECB Says

Updated on
  • Central bank sets out to prevent attempts to game supervision
  • About six months needed to get banking license in euro area

Skyscrapers stand in the financial district in Frankfurt.

Photographer: Krisztian Bocsi/Bloomberg

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Banks setting up in the euro area should be able to manage their risks locally, the European Central Bank said, underlining that it plans to prevent them gaming the rules to find the least demanding supervisor.

The ECB’s supervisory arm published a series of Frequently Asked Questions setting out what it expects of lenders planning to set up shop in the euro area, and emphasizing that it’s the entity that issues banking licenses and approves internal models. Subsidiaries in the EU should be able to manage risks independently and be in control of their own balance sheets, it said.

“The governance and risk management mechanisms should be commensurate with the nature, scale and complexity of the business and fully comply with European legislation,” the ECB’s Single Supervisory Mechanism said in the document. “Establishing an ‘empty shell’ company would not be acceptable.”

As European legislation stands, the SSM oversees all banks that are incorporated in the euro area and have more than 30 billion euros ($32 billion) in assets. Branches -- some of which can be very large -- of lenders based outside the bloc are supervised locally by national authorities. The SSM is concerned that lenders may attempt to play one supervisor off against another in an effort to keep demands for capital as limited as possible.

Looser Rules

In its review of EU banking legislation, the European Commission has proposed that lenders from outside the bloc should set up an “intermediate parent undertaking” to act as the owner of business units in the region and give the SSM a consolidated balance sheet it could supervise. As it stands, the requirement would exclude branches, although the assets accumulated by branches would count toward the group’s overall tally and help determine whether an IPU should be set up.

That has prompted allegations that some member states are seeking to undercut others in a bid to attract business. Ireland has complained to the commission that countries around the continent are offering looser rules to invite companies moving out of the U.K. after Brexit.

Banks looking to apply for a license in the euro area should probably do it as soon as possible.

“It usually takes six months from the applicant providing a complete application for a decision to be taken,” the ECB said, provided that all the documents and necessary information are provided. While a response must come within a year, this doesn’t take into account the time actually needed to move operations to Europe before the U.K.’s official exit from the EU in March 2019.

In the FAQ, the ECB also said any use of a bank’s existing risk models will only be allowed on a temporary basis, and it will ultimately need to approve them itself.

“We will also carefully consider any further comments from the U.K. supervisory authority on the quality of the models,” according to the FAQ. “In addition, banks must have applied for internal model approval in the euro area.”

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