February 15, 2019

Joachim Wuermeling, a member of the Executive Board of Deutsche Bundesbank, spoke at the Embassy of the Federal Republic of Germany in London. He discussed the implications of Brexit for UK branches of German banks. From the perspective of a bank and from the perspective of a banking supervisor, he mentioned that the future regime under which banks and companies, in general, will operate after March 29, 2019 remains unclear.

Prof. Joachim Wuermeling stated that UK branches of German banks (and Single Supervisory Mechanism, or SSM, banks in general) will need to become third-country branches, as per what is known at the moment. The temporary permissions regime of PRA certainly buys time. However, there is no alternative to conversion into third-country branches. So far, PRA has received some applications for third-country branch authorization in 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, it should be expected that the SSM addresses 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 the expectations of SSM. A third-country branch will not be allowed to perform central functions for its SSM domiciled group. Moreover, any outsourcing must not hamper the efficient and effective supervision of SSM entities. Not all SSM banks are currently fully compliant with the respective supervisory expectations of SSM.

Making the transition from the EU28 to the EU27 as smooth as possible for the financial sector will require close cooperation between SSM and PRA. The details of such a split of responsibilities are being negotiated. He discussed "....what a split of responsibilities would mean for UK branches of German (and other SSM) banks. The truth is: we can’t really tell just yet. We’ll have to wait for the final outcome of the negotiations between supervisory authorities. As I have said, these negotiations are already under way and I am optimistic that they will be concluded soon." Overall, the goal must be to achieve an adequate level of information-sharing and joint supervisory work that does not lead to an increased workload for all parties involved. The agreement on a split of responsibilities will need to leave room for accommodating specific cases. On the basis of the agreement, PRA plans to process applications for third-country branches. In the short run, the temporary permissions regime will mitigate the outcome of a possible hard Brexit.

Nevertheless, financial institutions must prepare thoroughly, although the outcome in the long run depends on the way Brexit re-shapes the European financial system. However, the uncertainty continues. Since the referendum in June 2016, both financial institutions and supervisors have put tremendous effort into better understanding and preparing for every possible outcome. Although some tasks are yet to be completed, most banks are well advanced in their preparations, said Prof. Wuermeling.

 

Related Link: Speech

 

Keywords: Europe, EU, UK, Germany, Banking, Brexit, SSM, Third Country Branches, Bundesbank, PRA, BIS