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Ifs and Buts

The Brexit debate last week was overshadowed by Theresa May becoming the UK’s new Prime Minister and some of her more radical appointments to her Cabinet. On top came the horrific terror attack in Nice and the failed coup d’état in Turkey.  Understandably, the core Brexit debate did not take centre stage but instead provided quieter background vocals. Press attention on Brexit is building again this week.

The Boston Consulting Group has issued a report on the potential Capital Cost for European Banks of Brexit that has triggered some wide media attention. The focus of the report was on European banks that could be forced to put as much as €40bn in extra capital into their UK branches as a result of the Leave vote. The main reason for this being that the “Passporting” [1] FN 1 rules would not apply for banks outside the EU zone.

At present, the European Economic Area (EEA) includes all 28 EU members plus Iceland, Liechtenstein and Norway.  I counted 76 banks on the European Banking Authority website from the EEA with branches in the UK. Not surprisingly Germany, France, Spain, Italy and the Netherlands have the biggest contingents. Among the 76 branches we find some of the biggest European banks (including Deutsche Bank, BNP Paribas, Santander, Société Générale, Natixis and Commerzbank). The vast majority of the branches are comparatively small, and some are the branches of American Financial Institutions that are mostly based in the Netherlands.

All major European banks with branches in the UK have much of their infrastructure outside the UK. To set up new infrastructure is costly and here is where the European banks may have an advantage over their American competitors. When I spoke to some of my contacts in large EEA branches recently, they played down the impact of Brexit. The common quote was “If Brexit happened, we would allocate a few hundred people. Otherwise no major problem”.

The passporting rules do not exempt the necessity to hold capital against credit exposure. The discussion focusses primarily on the geographic allocation of capital in the future. In a post Brexit world, UK banks would not operate in a regulatory Nirvana – capital rules which are linked to the Basle Accords are global, with I concede, certain variations.

The “Ifs and Buts” discussions will continue. I agree with the Boston Consulting Group analysis that banks will use the opportunity of Brexit to reconsider their business models and take restructuring measures that are necessary or overdue.  These considerations will affect many industries beyond banks and other financial institutions.  I continue to struggle to believe that the UK will sacrifice the access to the single market. The passporting rules have been very important to UK financial institutions. They will undoubtedly make their voices heard when negotiations eventually start.

[1] “Subject to its fulfilment of conditions under the relevant single market directive, a firm authorised in a European Economic Area (EEA) state is entitled to carry on permitted activities in any other EEA state by either exercising the right of establishment (of a branch and/or agents) or providing cross-border services. This is referred to in Financial Services and Markets Act 2000 (as amended) (FSMA) as an EEA right and the exercise of this right is known as ‘passporting’.” http://www.bankofengland.co.uk/pra/Pages/authorisations/passporting/default.aspx

Rudi Lang

Global Financial Institutions Group Leader

Rudi leads Mazars’ Global Financial Institutions Group and is the Head of Mazars’ Global Monitoring Trustee Services. He has over 20 years’ experience within the financial services industry, working with Mazars’ largest clients, European regulators and public authorities. His experience includes the co-ordination of complex, cross border regulatory projects, large scale projects around European restructuring and special risk management assignments for international banking clients. He has been engaged in Prudential Capital Assessment Reviews and Asset Quality Reviews for a number of European banks and acts as a skilled person for regulators in the UK and across Europe. Rudi is also currently the Monitoring Trustee of some of the most prominent state aid cases in Europe. Rudi is committed to driving industry best practice and to that end has been part of the ICAEW working party formed to examine the dialogue between bank auditors and audit committees. He is a German...
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