Banks' preparations for Brexit.
The European Banking Authority (EBA) has issued an opinion (PDF 128 KB) on banks' preparations for Brexit. The EBA calls upon supervisors to ensure that banks are preparing adequately for Brexit, and meeting their obligations to their customers in these circumstances.
In particular, the EBA states (on the basis of its discussions with supervisory authorities) that banks' preparations are currently inadequate for an immediate Brexit on 30 March 2019 without a ratified withdrawal agreement, and therefore without a transition period.
The EBA's opinion covers both UK-based banks that provide services to EU27 counterparties, clients or customers, and EU27-based banks that provide services to the UK. The opinion has already been criticised by UK regulators for implying that UK banks have not undertaken sufficient contingency planning.
A challenging and unpredictable period
The challenge of restructuring financial institutions operating in the UK and Europe in order to meet the moving target of Brexit was always going to be bespoke, complex and time consuming. It is unlikely that any bank will be 100% ready for March 2019 given the scale of the challenge. However, taking the no regrets actions to ensure businesses stay open and operational becomes ever more urgent as the Brexit clock counts down and uncertainty remains the overwhelming political narrative. If they haven’t already, firms should ensure they have the regulatory permissions needed to operate, check that their complex cross-border contracts are valid and enforceable, review counterparty risk, check data flows and ensure market access arrangements. The beginning of 2019 looks likely to be a truly challenging and unpredictable period.
The EBA focuses on seven areas where supervisors should be engaging with banks:
The EBA highlights risks from banking activities between the EU27 and the UK, including direct financial exposures, financial contracts, reliance on financial market infrastructures, data storage and wholesale funding. Banks should be assessing these risks and planning actively to mitigate them. Where banks withdraw from an activity or market as a result they should consider how to deal with existing business and contracts, and in particular should consider their obligations to their customers.
Banks should not book business in 'empty shell' companies, and should have the substance to identify the capability to manage the risks they generate from the first day after Brexit.
The EBA makes no mention of the possibility of legislative action to provide contract certainty, suggesting instead that banks should take their own actions to amend or replace contracts, and to contact affected clients accordingly.
Similarly, banks should consider taking their own mitigating actions to deal with data transfer and storage issues, such as transferring the location of the storage of data and including data-processing clauses in new and existing contracts.
FMIs and wholesale funding
Banks should consider the possibility that they may lose access to some FMIs and wholesale funding, and make alternative arrangements accordingly.
The EBA suggests that liabilities issued under UK (or EU27) law may not be eligible for inclusion in EU (UK) banks' MREL, at least not without additional contractual clauses. [Comment: not only does this this seem to take the EBA beyond its areas competence (it is not a grouping of resolution authorities) but it is also an overly strict reading of the BRRD, Article 45(5) of which allows explicitly for liabilities governed by the law of a third country to be MREL eligible, provided that certain conditions are met.]
Banks should assess carefully their obligations to (existing and prospective) customers, and take any necessary actions to ensure the continuity of services in the light of their continuing contractual commitments.