Banks Must Step Up ‘Inadequate’ Brexit Preparations, EBA Says

(Bloomberg) -- Follow @Brexit on Twitter, join our Facebook group and sign up to our daily Brexit Bulletin.

Banks’ preparations for the U.K. crashing out of the European Union without even a transitional deal are “inadequate” and must be stepped up, the bloc’s top banking regulator said.

Financial institutions need to be more aware of the ways in which they interact, the European Banking Authority said in an opinion published Monday. The opinion aims to guide the activities of national regulators and supervisors. It has indirect implications for a broader range of financial firms such as investment managers and central counterparties.

“There is a plausible bad outcome that there won’t be a ratified withdrawal agreement, there won’t be a transition agreement,” said Piers Haben, director of banking markets innovation and consumers at the EBA in London.

Time to reach a deal with the EU is running out as divisions within the British government and parliament prevent the U.K. from pursuing a clear strategy. Speaking to the Irish parliament on Thursday, European Commission President Jean Claude Juncker called for “more answers and fewer new questions” in the search for a solution.

Relocation Begins

Financial companies in Britain have been setting up subsidiaries in the region and moving some employees to centers such as Frankfurt, Paris and Dublin to ensure they can still serve EU customers after March 29, the day when the U.K. will formally leave the EU. But such arrangements don’t go far enough, the EBA suggests.

“Firms cannot take for granted that they continue to operate as at present, nor can they rely on as yet unrealised political agreements or public policy interventions,” Andrea Enria, chairman of the EBA, said in a statement. “Risks, capacity and legal implications must be examined and addressed.”

The EBA recommends counterparties identify the exposures they have to each other, the contracts they share, their use of the companies that operate the plumbing of financial markets, the ways they handle data transmission and storage, and their reliance on various funding markets. Banks should also look at how they plan to handle issues arising from the U.K. leaving the EU’s legal framework, such as whether they will be able to count bonds governed by English law toward the loss-absorbing debt they must issue.

Contracts Conundrum

The EBA played down British concerns about the risks to 26 trillion pounds ($34 trillion) of derivative contracts and 36 million insurance policy holders that could be affected when the U.K. drops out of the single market. Brexit means firms could lose the authorizations they need to service these contracts in a hard Brexit with no trade deal, leaving their clients in the lurch.

U.K. regulators are calling for the European Commission and the British government to settle the issue of contract continuity with an inter-governmental deal, saying there simply isn’t time for firms to handle the issue themselves. The Europeans instead say that isn’t necessary and that the onus is on firms to be ready -- an approach that U.K. lobbyists describe as “a dangerous game of chicken.”

The EBA mentions continuity twice in its 10-page opinion. It says the competent authorities should ensure that the financial institutions they supervise do what’s needed to meet their contractual commitments.

©2018 Bloomberg L.P.