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Europe gets creative to win banks after Brexit

FILE PHOTO: The Canary Wharf business district is seen reflected in windows at dusk in London, Britain December 11, 2016. REUTERS/Toby Melville/File Photo

By Anjuli Davies, Andrew MacAskill and John O'Donnell

LONDON/FRANKFURT (Reuters) - Regulators in European countries competing for post-Brexit banking business are offering London-based banks a range of short-term workarounds to help them relocate, bankers, regulators and lawyers say.

Global banks have warned they might have to move their European bases from Britain if its departure from the European Union means they lose "passporting" rights to operate across the bloc under the supervision of just one member state's regulator.

Brexit negotiations have yet to start and will take years but big centers like Frankfurt and Paris, as well as smaller ones like Dublin, Amsterdam and Luxembourg, are encouraging banks, insurers and fund managers to consider moving to them.

Financial watchdogs have told banks they will need to create more than so-called brass plate operations; they will have to have a certain amount of capital, senior staff on the ground and approved risk models to get a license to operate across the EU.

They are looking at ways to make the transition easier, however by allowing institutions which typically have very complex operations to move fewer jobs and assets over from Britain in the near term.

Proposals outlined to Reuters by people involved in talks between regulators and banks include 'back-to-back' trades, where a deal done on the continent could be processed in London, and licensing certain activities more quickly than usual.

"Various jurisdictions are going to try to make it as attractive as possible to set up there," said Mark Compton, a financial services lawyer at Mayer Brown in London.

"They will try to be as flexible and accommodating where they can. But it will vary from jurisdiction to jurisdiction, the appetite of the regulator and the constraints put on them by central authorities."


While the European Central Bank is chiefly responsible for supervising big banks in the euro zone, national authorities such as Bafin do much of the day-to-day supervision, especially of smaller lenders.

The ECB must first grant the license for, say, a London-based bank that wants to move operations to Frankfurt. Bafin could afterwards show some flexibility in its supervision, so long as this is in line with European rules.

German regulator Bafin met about 50 envoys from roughly 25 foreign banks on Monday to explain how they could move business to Europe's biggest economy after Britain leaves the European Union. Many asked how large a German operation should be to win the regulator's blessing.

Bafin's Peter Lutz, who met the banks, said after the gathering that it would take into account that a bank was gradually building up its business, as long as the plan was to eventually establish a substantial operation.

Bafin could adjust its demands, for example, as to how many people must be based in, say, Frankfurt or how much capital is needed – at the outset.

"We are talking about big internationally active banks," he told reporters, adding that he was open to arrangements during a gradual transition from London to Germany. "Naturally, we can talk about transitional arrangements."

One official said one such possibility is the limited and temporary use of so-called 'back-to-back' arrangements, where a bank in Germany gives, say, a loan on the continent but processes it through its London head office.

"Part of the new strategy (of Bafin) is to show banks that the regulator is open to speak and discuss new policy tools for foreign banks," the official familiar with the matter told Reuters on condition of anonymity.

"The overall question with regulators is how far can services be outsourced to London initially."

This could help banks in London stagger the migration of staff and systems.


French regulators have also spoken to banks about simplifying and accelerating the licensing process for financial institutions considering moving operations due to Brexit.

"Banks are doing contingency planning, which means that in a very short period of time they will need to transfer some quite significant operational and IT teams," a source at a French financial regulator said.

"It is logical that it will happen in a progressive way and that technical constraints are taken into account (by a regulator)."

Irish regulators, too, are considering the practical and logistical constraints firms face in having to do a number of things in a relatively short time frame, Gerry Cross, Director of Policy and Risk at Ireland's Central Bank said last week.

"We are open to thinking constructively about how this practical sequencing challenge might be addressed, how things might be arranged so that the various objectives can be met, without of course undermining our commitment to our responsibilities," Cross said.

    European regulators need to clarify which transitional arrangements will be approved and offer flexibility on an 'interim fix' at the onset of the Brexit process or risk disruption to financial markets, the Association for Financial Markets in Europe (AFME) industry body said in report this week.

"Some banks are also considering migration to a short-term or transitional way of operating in order to be ready for Brexit," the report, which analyzed the Brexit planning measures of 15 banks of varying sizes and from different home regions.

"Their plans are therefore dependent upon regulatory approvals for transitional operating arrangements."

Investment banks with large sales and trading operations, which buy and sell foreign exchange, debt, equities and other financial instruments for clients across Europe, require specialized talent and regulators who are familiar with sometimes esoteric financial instruments.

Approving for example, complex internal risk models used by banks to calculate risk on their balance sheets, requires expertise and can have an impact on how much capital needs to be held to back risky assets.

This is another area regulators could initially be flexible on, lawyers say, given that some regulators need to build up their own expertise on the issue.

If these workarounds are approved, it would mean more banking staff and assets would stay in Britain for the short-term and UK regulators, used to supervising complex investment banks, would continue to have an influential role over the EU's financial markets.

The banks are making the most of the competition.

"Lots of member states are very keen to have financial firms," said one banking source speaking on condition of anonymity as discussions are private.

"We are doing a lot of work with different regulators on accepting various solutions and interim arrangements. Regulators are having to be a little imaginative.”

For now, regulators say they will require senior risk managers in situ as well as some infrastructure, but staffing could be built up over time whilst banks scout for offices and local staff.

"There is the expectation by regulators of substance on the ground," said one legal source. "The million dollar question is how much substance does there need to be."

(Additional reporting by Maya Nikolaeva in Paris and Padraic Halpin in Dublin, editing by Philippa Fletcher)