Impact of Brexit on Ireland and Germany’s banks having UK branches

Two interesting speeches as Europe tries to look at hard Brexit.

Lane as Ireland faces the deepest concerns due to Brexit. He looks at both macro risks and financial stability risks:

Our modelling work suggest that a disorderly Brexit could reduce the growth rate of the Irish economy by up to four percentage points in the first year. In addition to the direct disruption to international trading arrangements, adverse developments in the UK economy have a general spillover impact in Ireland, via export demand, the value of Irish-owned operations in the UK, asset prices and confidence effects. Moreover, a significant further depreciation of Sterling against the euro would adversely affect those firms dependent on the UK market, even if there are some offsetting positive effects for domestic firms through the favourable impact on the terms of trade.

Given the current favourable forecasts for the economy as a result of domestic demand and the strong non-UK multinational sector, our assessment is that there would still be some positive growth in output this year and next even under a no-deal scenario, but materially lower than in the central forecast. A further mitigating factor is that the state of the public finances will permit the running of a counter-cyclical fiscal deficit through the operation of the automatic stabilisers on tax revenues and transfer payments.

…..

On the basis of the work that we and others have undertaken, I am satisfied that the immediate cliff-edge risks of a hard Brexit have been largely addressed. In addition to the preparations by individual firms, this has included the temporary permission by the European authorities for the UK central securities depository (CSD) to continue to serve Irish securities during the transition to an alternative EU27 CSD arrangement.

There are some remaining risks of consumer detriment. The Irish and UK financial systems are closely connected, with UK firms and firms from Gibraltar providing financial services to Irish consumers, including insurance and payment services. We have worked with the European and UK authorities to ensure that those firms providing services to Irish consumers are able to continue to do so in the event of a hard Brexit. The vast majority of UK-based firms have taken appropriate action, but not all have to date. In this context, I am pleased that the Central Bank of Ireland has worked with the Department of Finance to support the drafting of legislation to create a temporary run-off regime that will protect insurance customers in event of a no-deal Brexit.

In terms of financial stability risks, our assessment is that the improvements in the resilience of the financial system over the last decade provide a vitally-important buffer. Taken together, the more balanced macroeconomic profile, the restructuring of the Irish banking system, the much-higher capital and liquidity ratios, the decline in the non-performing loan ratio and the more intrusive supervisory regime mean that the capacity to absorb negative shocks is much greater than in the past.

On German banks having branches in UK:

This means that – given what we know at the moment – UK branches of German banks (and SSM banks in general) will need to become third country branches.

Certainly, the PRA’s temporary permissions regime buys time. Nevertheless, there is no alternative to conversion into third country branches. The PRA has already received some applications for third country branch authorisation in the UK.

For German banks, unlike other SSM banks, there is no formal requirement for the home supervisor to approve a third country branch. However, given the aim of establishing a level playing field among all current and future SSM banks, you should expect the SSM to address certain requirements via other supervisory measures where necessary to ensure that the future set-up of the new third country branches is in line with SSM expectations.

This means that the SSM will not accept empty shells, neither from incoming nor from outgoing banks. A third country branch will not be allowed to perform central functions for its SSM-domiciled group. And any outsourcing must not hamper the efficient and effective supervision of SSM entities.

Not all SSM banks are currently fully compliant with the SSM’s respective supervisory expectations. In particular, all banks must ensure that they have relocated sufficient staff to the EU27 entities.

EU business must be booked from within the EU27. This will require significant asset transfers in several cases. Sufficient trading and risk-management staff as well as technical infrastructure are needed on site at the EU27 entities to ensure adequate risk management.

Really complicated stuff as always from Europe…With so many different kinds of banking systems, it will be something to get out of Brexit.

 

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