European banks must continue to plan for a full Brexit in 2019

Key eurozone financial supervisors have told banks to continue planning for Brexit without any transition provisions, despite this week’s agreement to delay the UK’s exit from the EU’s single market.

Banking authorities in the region are maintaining an end-June deadline for groups operating in the UK to apply for eurozone banking licenses under possible relocation plans to deal with Brexit.

Andreas Dombret, executive director of banking supervision at the Bundesbank, Germany’s central bank, said on Tuesday it was “too early to relax” despite the EU-UK goal of a transition for make Brexit “less painful”.

Such advice could leave big international banks with the dilemma of how to prepare for Britain’s departure, as it conflicts with Bank of England guidance, which should give lenders more breathing room. following Monday’s 21-month transition deal.

The problem facing lenders and authorities is that, although the transitional agreement is about to be approved by EU leaders at a summit on Friday, it will not be legally binding until a comprehensive Brexit deal will not be agreed and ratified – and may still be vulnerable to political risk.

This puts regulators in a crucial position over whether to require lenders to focus on March 2019 – the Brexit date – or December 2020 – the end of the proposed transition period.

Mr Dombret said on Tuesday that the Bundesbank, which shares supervision of German banks with BaFin, the country’s financial watchdog, would not be willing to go beyond the lack of legal certainty.

“Many issues still need to be discussed and the transition period is still not fully guaranteed,” he told an audience in Dublin, pointing to unresolved issues such as the continuing differences between the EU and the UK over the Irish border. “The . . . the phrase that ‘nothing is agreed until everything is agreed’ still holds true.”

By contrast, the BoE, which oversees the biggest lenders and insurers operating in the UK, has already said it would give ‘regulatory backing’ to any clear policy agreement on the transition period, even if it is not. not legally finalized.

It would buy more time for businesses in the City of London – headquartered in both the UK and the EU27 – who would otherwise have to plan for the worst on the assumption that the UK will come out of the bloc in March 2019.

Mr. Dombret’s position is close to that of the supervisory wing of the European Central Bank, the Single Supervisory Mechanism, which is supposed to have a conservative view of the applicability of any transition agreement.

The SSM declined to comment. Sabine Lautenschläger, vice president of the SSM, said in February that banks had until the end of the second quarter to apply for a banking license.

Ms Lautenschläger said only banks that had “already presented high-quality and credible plans” would be given more time to implement relocation plans in the event of a transition period. The SSM is in talks with around 50 banks over their Brexit plans.

SSM officials worry that some lenders are not taking the June deadline seriously and that the transition agreement will be used as a tool to delay the development of credible plans.

The BoE itself warned last week that regulators and politicians on both sides of the Channel needed to do more, even with a transition deal, to address the legal uncertainty posed by Brexit that is weighing on many derivative contracts and insurance policies.

The BoE has long said that unless a transition deal is agreed, it would expect companies to start rolling out their contingency plans to move operations and jobs at the end of the first quarter of 2018 – which is now just over a week away.