June 27, 2018

Prof. Joachim Wuermeling the Deutsche Bundesbank spoke at the annual reception of the Association of Foreign Banks in Germany, Frankfurt. He spoke about the future of Europe as a financial center after Brexit. Out of the three key aspects he addressed, the first is that banks looking to relocate their business to the EU or expand their presence in Europe after Brexit will be asked to satisfy the same minimum prudential standards that foreign banks already operating within the EU and domestic institutions are expected to comply with. This is underpinned by the fundamental belief that supervisors must be capable of intervening in the business activities of institutions operating within their own jurisdiction at all times.

Additionally, solutions will need to be found to prevent any unnecessary additional expense. A transitional period, at least as outlined in principle in March, could help with this. It would lower the long-term costs of exit by allowing firms to reflect on their options and decide which markets they want to operate in and which organizational structures would best allow them to strike the right balance between compliance and profitability. “However, we cannot count on there being a transitional period right now, since negotiations could break down at any time,” said Prof. Wuermeling. With respect to cross-border businesses (the second aspect), he said that, in future, institutions that conduct cross-border business will be heavily dependent on how the respective supervisors oversee third-country institutions and how the authorities involved will cooperate internationally. “In the SSM, our baseline assumption is still the worst case, ie a no-deal scenario. And judging by recent developments in the United Kingdom, this seems more than appropriate. … We expect all banks to make provisions for a hard Brexit. And that’s why I would strongly urge all institutions to make the necessary preparations to keep their business operations running even if there is a hard Brexit on March 29, 2019. Institutions that submit an application after the end of the current quarter will find that the likelihood of their licensing procedure being concluded in time will diminish considerably.”

The third aspect he discussed is that, “… we nonetheless need to continue to press ahead with our vision of a harmonized financial market in the EU—a digital financial center of Europe which offers as yet untapped potential.” Earlier EU initiatives—the single financial market, the banking union, and the capital markets union—all had an inward focus. Additionally, with London, Europe had an international financial center. This will now change. Hence, the question is whether the EU 27 should aspire to developing a globally competitive financial center that is more than the sum of its parts in Frankfurt, Paris, Amsterdam, or Dublin. “François Villeroy de Galhau, the governor of the Banque de France, recently spoke of an integrated network with centers specialized in various activities—and I am thinking along the same lines, which include major efforts to harness digital potential as well, “ said Prof. Wuermeling. “I would like to help kick off a broad, forward-looking debate surrounding the concept of a digital financial center of Europe.”

He believes that this idea is based on three pillars. First, is the networking pillar, as Europe’s financial services potential is spread over various locations. The second pillar is digitalization. “Financial centers in continental Europe need robust digital market infrastructure that leverages all the state-of-the-art digital capabilities—of which distributed ledger technology (DLT) is but one. Only then can these centers overcome fragmentation and replicate agglomeration effects of physical proximity. The Eurosystem will also be expected to contribute here, seeing as it already provides a key piece of infrastructure for payments in the shape of the TARGET system.” These first two pillars create a digital network across European financial centers. Additionally, market-driven specialization will also be needed as a third pillar. “Specialization can help deliver economies of scale, increase the potential for innovation, and achieve excellence. In an environment of “coopetition”—a neologism merging the words cooperation and competition, European financial centers could cooperate, compete and, at the same time, hone their own areas of expertise. But this is a vision for the future,” he concluded.

 

Related Link: Speech

Keywords: Europe, EU, Banking, Insurance, Securities, PMI, Brexit, European Financial Center, Withdrawal Agreement, Bundesbank

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