business

Brexit Banks Must Pick EU Base by June, German Official Says

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  • Last-minute applications may not be processed in time, he says
  • About 100 banks operating out of U.K. need EU licenses

Banks that want to open or expand a base in the European Union after Brexit should apply for licenses by the end of June, according to Bundesbank Executive Board member Andreas Dombret.

Otherwise they may find it’s too late to have their applications processed, Dombret said in an interview at Bloomberg’s London headquarters on Thursday. Stability is the priority for financial supervisors as the U.K. gets closer to leaving the EU, meaning that decisions on location have to be taken early, he said. There may be about 100 banks currently operating out of the U.K. that need EU licenses, he said.

“Eleventh-hour applications may not be processed in time,” said Dombret, who’s responsible for banking and financial supervision at the Bundesbank and is also a board member of the European Central Bank’s supervisory arm. “It’s better to apply early and change the application if things change, rather than wait to apply.”

Prime Minister Theresa May’s weakened government, split between ministers and lawmakers who demand a clean break from the EU and those who want to stay close to the bloc, is struggling to agree on the shape of a future relationship. The lack of certainty is making it difficult for bankers to know where to base their businesses after Brexit.

Taking Steps

So far, eight banks have taken formal steps to seek new licenses to expand their operations to the euro area ahead of Brexit, Sabine Lautenschlaeger, vice chair of the ECB’s oversight arm, said Wednesday. More than 50 are in a pre-application phase.

With Europe’s banking passport available only to firms based in the European Economic Area -- the EU plus Iceland, Liechtenstein and Norway -- others are looking at so-called regulatory equivalence to claw back some of the same rights.

To qualify, the European Commission has to determine that a third country’s rules are as tough as its own, which allows that nation’s companies to conduct some business within the bloc.

Equivalence “is not a concept I can apply” to a financial center as large as the U.K., Dombret said. The idea was conceived of to allow firms from smaller centers to operate in Europe, he said.

There has been “a steady decline in expectations of how deep the integration will be after Brexit,” Dombret said a speech to U.K. Finance, the British banking lobby group, on Thursday. “It quickly fell from remaining part of the single market and passporting to the approach of equivalence in supervisory regimes, on the basis of which access could have been granted.”

While U.K. Finance has proposed an accord based around mutual recognition of supervisory regimes, Dombret said he was skeptical that it was possible. The likelihood of a no-deal scenario is real, and if an agreement is reached, it may be very limited in terms of services, he said.

Senior German officials have warned against taking advantage of the U.K.’s withdrawal from the EU to damage Britain’s finance industry, saying this may compromise financial stability across the continent. Dombret said the German economy needs the financial products created by London-based firms.

Profitability Lagging

German banks should consolidate for economic issues including profitability, rather than to cut their administrative burden, Dombret said. “I don’t have an idea in my mind what the optimal size is of the banking industry in Germany,” he said. “The market should decide.” Profitability at the country’s banks is lagging, as is efficiency, he said.

In Germany’s crowded banking system, lenders with less than 3 billion euros ($3.7 billion) of assets make up 82 percent of institutions. While Dombret anticipates lenders buying each other domestically at first, he also expects to see some cross-border deals.

The Bundesbank official expressed concern about efforts to force London-based clearinghouses to relocate elsewhere in the EU, saying that their location is irrelevant so long as European supervisors maintain their powers in a post-Brexit U.K.

“Supervisory colleges give a very clear view of London’s clearinghouses,” and if EU authorities maintain their rights, location is not an issue, Dombret said.

(Adds comments on a potential deal from eighth paragraph.)
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