finance

EU warns banks to be ready for no-deal Brexit


Europe’s top official in charge of winding down failed banks has urged the industry to press ahead with preparations for a no-deal Brexit, saying lenders should not expect regulators to help them cope with any upheaval caused by the UK’s departure.

Elke König, the head of the eurozone’s Single Resolution Board, told the Financial Times in an interview that banks should not expect any leeway in meeting a key regulatory standard set by the agency.

“I’ve told the banks that for now you can’t hope for the white knight to come along so rather look at it, be prepared,” Ms König said.

She also warned that any banks moving to the EU to retain access to the bloc’s market could not carry out “letterbox” relocations and would have to move “real people” — so regulators could effectively take charge of the institutions in times of crisis.

“It needs to be an entity within the group where we have an understanding of what, if something goes wrong, will happen, and how do we get control,” she said.

Both the EU and the UK have stepped up their general no-deal Brexit preparations as talks on an exit agreement drag on. With an exit agreement, the SRB’s concerns would not immediately arise when Britain leaves — but many matters affecting the financial sector would be left unresolved by a no-deal Brexit.

Ms König referred to rules requiring banks to issue a minimum amount of unsecured debt and other securities that can be easily written down by regulators if the institution fails. The idea behind the measure is that imposing losses on the holders of the securities helps to repair the bank’s finances. Her board determines how much of these so-called “minimum requirement for own funds and eligible liabilities”, or MREL, a bank needs to issue. The European benchmark is set at 8 per cent of liabilities.

If Britain leaves the EU without an exit deal, bank bonds issued under UK law will no longer be eligible as MREL unless banks insert contractual clauses to make clear that the SRB can wipe out the securities. Failing this, banks could issue extra debt to meet their target.

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According to industry estimates, there is more than €100bn of MREL-eligible bank debt that has been issued under English law by European banks based outside the UK.

Ms König said banks should not assume a regulatory solution and should prepare for the worst. “In principle, any issuance under UK and English law . . . will become third country issuance and will not be MREL-eligible unless it has a suitable relevant contractual clause,” she said.

She said that while larger banks had been making preparations, the SRB wanted to make sure the industry was fully prepared and that smaller banks were not caught off guard. The SRB is set to publish guidance for banks in the coming weeks.

Ms König said that banks relocating to the eurozone in response to Brexit would need to move enough personnel and data systems so the SRB could get access to the information it would need should the lenders get into difficulties.

“We are currently in dialogue with the banks, so individual institutions get a checklist of what we expect them to do”, Ms König said, adding that the priority was to make sure that the SRB could successfully intervene if they failed.

Ms König said her aim was not to “put a big fence” around the EU.

Her comments reflect a broader EU stance that the financial sector itself, rather than public authorities, should lead preparations for a no-deal Brexit. EU officials believe that if they make too many contingencies, it would be tantamount to helping the UK preserve London’s valuable access to the EU single market by the back door.

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Valdis Dombrovskis, the EU commission vice-president responsible for financial services policy, has downplayed warnings from the Bank of England that vast numbers of derivatives and insurance contracts could be at risk if regulators did not put contingency measures in place before Brexit day.

At the same time, Brussels and the ECB have indicated that more targeted steps may be needed to counter threats to some derivatives trading.

The SRB, which was set up in 2015, is the chief authority for handling bank crises in the eurozone and its one of its main banking authorities alongside the European Central Bank, which handles day-to-day supervision.

Call for a morning-after ‘liquidity facility’

Elke König said there were still gaps in the eurozone’s arsenal for tackling bank failures — and urged governments to address them as part of their broader push to reinforce the currency bloc.

She said a priority was to create a “liquidity facility” that would help to stabilise a bank on the day it opened after a restructuring — typically a Monday, given that weekends provide the best opportunity for intervention. She said talks on the idea with the ECB were still in their “infancy” but said the move would mirror powers available to the Bank of England and US regulators.

Ms König also urged progress on a plan for governments to “backstop” a €55bn fund, financed by levies on the banks, that the SRB can tap when handling crises.

EU leaders have called for a deal on the backstop plan by the end of this year but talks have been complicated by the fact that the industry-financed pool of cash will not be fully funded before 2024.

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