Following Brexit, some of the largest banks set up minimally staffed trading desks in the eurozone. The ECB is now pressuring the banks to ramp up staff and capital, including UBS.
The European Central Bank (ECB) has once again called on some of the largest Wall Street and City of London banks to bulk up the trading desks they set up in the eurozone following Brexit in order to reduce their reliance on business outside the single-currency block, according to a report in the «Financial Times» (behind paywall).
Such «empty shell structures...are a very real concern,» Andrea Enria, the head of supervision at the ECB wrote in a blog post.
Not Following the Money
After Britain left the European Union, global banks were forced to split up their business in Europe, most of it London-based, to locations within the EU such as Frankfurt, Paris, Amsterdam, and Dublin. While assets in the hundreds of billions of dollars were shifted, people did not follow the money.
The large migration of bankers and staff that was expected following Brexit didn't materialize, with estimates that around 7,000 people have left, according to the «FT».
No Specific Targets
According to Enria, the «ECB is not setting specific targets for the relocation of banking business to the euro area,» but that the central bank wants to «ensure that incoming legal entities have onshore governance and risk management arrangements that are commensurate, from a prudential perspective, with the risk they originate».
The ECB conducted an assessment of eight global investment banks: JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, HSBC, Barclay's, and UBS. It showed that of over 250 trading desks at the seven banks reviewed, one had been assessed previously, and none «retain full control of their balance sheets»
Grace Period
Banks were given more time by the ECB to relocate executives to the eurozone because of the disruption caused by the Coronavirus pandemic. But after the travel restrictions were lifted and the central bank stepped up the pressure again, many top traders still seem reluctant to leave London, the report adds.
The ECB seems to be walking a fine line By increasing the pressure, the ECB risks exacerbating tensions with the Bank of England (BoE), and officials are concerned about a «hollowing out» of British banks, according to the report.
Operational and Counterparty Risk
What is at issue, according to Enria, is that banks are exposed to increased operational and counterparty risk in comparison to their parent entity. In a possible crisis, a eurozone domiciled bank having large unsecured positions and little or no access to staff could leave it vulnerable.
He said that the ECB has identified over 50 of the most important trading desks upon which will «issue binding decisions» to the parent with the requirement to increase eurozone operations for face fines.
Among the measures is appointing a head of trading for each unit «with clearly defined reporting lines and a compensation structure linked to the performance of that entity», the «Financial Times» reported.
