LONDON — Preparation for Brexit by U.K.-based financial institutions are “inadequate,” and they should “rapidly advance” the execution of their contingency plans, the EU banking regulator said Monday.
In a newly released opinion paper, the European Banking Authority flags concerns over the pace of banks preparations for a no-deal Brexit, adding that “the time for the required actions to be taken is reducing.”
“Financial stability should not be put at risk because financial institutions are trying to avoid costs,” the paper says.
Speaking to POLITICO, Piers Haben, the EBAs director of banking markets, innovation and consumers, said: “We have no specific view on the probability of one outcome or the other, but there is a material possibility there wont be a ratified Withdrawal Agreement come March 2019. There isnt time to wait and see.”
The regulators intervention just days before EU leaders gather in Brussels for a European Council summit meeting in Brussels will add to tensions between the two sides in the Brexit talks.
Firms have repeatedly said the high costs of moving is one of the reasons they are approaching Brexit very gradually.
London and Brussels are at loggerheads over how financial services will be dealt with in the eventual Brexit deal with suspicions in the City that chief EU negotiator Michael Barnier is deliberately prolonging the uncertainty in order to prompt more banks to move staff to the Continent.
The British government had hoped that a standstill transition deal agreed in March would provide greater certainty for businesses by pushing the Brexit cliff edge out from March next year to January 2021. But the EBA opinion paper argues that until the transition is certain — when the Withdrawal Agreement is signed and ratified — banks should be preparing for the U.K. to crash out of the EU next year.
“Progress in the preparation for [a no-deal scenario] is inadequate,” read the opinion, and the transition period does not provide any “legal certainty until the Withdrawal Agreement is ratified.”
The message from the EBA — which itself is moving from London to Paris because of Brexit — is that in such an uncertain climate, firms need to get on with it, and should not believe they can rely on the public sector to bail them out if things go wrong.
The City of London employs around 360,000 workers | Daniel Berehulak/Getty Images | Icons by Vasava for POLITICO
“There wont be a public-policy solution to private-sector problems,” the EBAs Haben said, adding “public authorities wouldnt be forced to step in.”
The EBA opinion argues that firms should evaluate “direct financial exposures to the EU” and vice-versa, as well as existing cross-boarder contracts and reliance on U.K. or EU infrastructure and markets funding. It said banks should identify individual “risk channels” (beyond the general risk of market turmoil) arising from a no-deal Brexit.
“If financial institutions identify relevant risks, they should consider the implications in the event that these risks materialize,” the EBA said. And if financial institutions conclude that “withdrawing from the relevant market is the appropriate action,” they should consider how to deal with existing business and customers; otherwise they should act to get the relevant regulatory authorizations.
Until now, City executives have been adamant the U.K. government and its European counterparts would understand the implications for their respective economies of divorcing without a financial services deal allowing full market access. But as the talks have continued with no sign of the negotiators approaching a solution, that faith is being tested.
“This is a wake-up call for banks,” said Haben.
One senior banking executive, however, said major banks “dont need a wake-up call because they are ready to move their entire operations” — only they wont, until theyre certain they have to. “And the EBA cant dictate us what to do,” the banker said.
British and European flags in Gibraltar | Sean Gallup/Getty Images
Firms have repeatedly said the high costs of moving is one of the reasons they are approaching Brexit very gradually and dont want to execute their plans in full before they have absolute clarity over future EU-U.K. relations.
The EBA said it is “cognizant” necessary actions will entail costs; however, it is “an inevitable consequence” of the breakup and Haben called it “money well spent.”
“We arent going to go on a wing and a prayer,” he said.
CORRECTION: A previous version of this article misstated Piers Habens title. He is the EBAs director of banking markets, innovation and consumers.
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