#Brexit: ‘We will not participate in a race to the bottom’ European Central Bank

In a statement to introduce the European Central Bank’s (ECB) annual report on its supervisory activities. Sabine Lautenschläger, Vice-Chair of the Supervisory Board of the ECB took the opportunity to make a clear statement of the ECB’s views on Brexit and the situation of British banks.

While the EU and the UK have not started negotiating Lautenschläger pointed out that both banks and supervisors must prepare for any potential scenario. She said that the main issue would be market access.

Currently, many UK banks rely on the European passport arrangements to operate in the single market. The passport gives them access to the entire single market as long as they are established in an EU country. Lautenschläger said that in the event of a “hard” Brexit, UK banks might lose this passport and would have to seek another path into the single market.

To get around this  she thinks that many banks will try to obtain a banking licence in an EU country in order to regain the passport. Lautenschläger made it clear though that this licence would have to be granted by the ECB and that it will only grant licences to well-capitalised and well-managed banks.

“We will not accept empty shell companies. Any new entity must have adequate local risk management, sufficient local staff and operational independence. To enable banks to comprehensively comply with our requirements, we will grant bank-specific phase-in periods. In doing so, we will take into account the business activities and the risk profile of each bank,” said Lautenschläger.

Lautenschläger will not allow UK banks to game the system: “We will be cautious of regulatory and supervisory arbitrage, and we will not take part in a race to the bottom. That’s why we will keep a close eye on how banking groups structure their euro area entities.

“Some banks might want to use a complex and diverse set-up, adapted to the range of activities they plan to pursue in the euro area.”

Review of the European legislative framework

Lautenschläger made it clear that those who consider using a third-country branch for part of their banking business might find that this is one aspect of the legislation that will be reviewed in the review of Europe’s supervisory framework. She said that third countries that have say lower capital and liquidity requirements “runs counter to the idea of a level playing field in the euro area.. (and) was an invitation to banks to engage in regulatory or supervisory arbitrage.

Finally, Lautenschläger said: “Brexit will bring a major change. That much is clear. One thing will not change, though is that the financial sectors in the UK and the EU will remain closely connected.”

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