Andreas Dombret of Deutsche Bundesbank discussed the formal aspects of the relationship between Germany and the UK in finance after Brexit. He emphasized that pragmatic ways need to be discovered to establish a new, respectful, and friendly partnership.
Dr. Dombret stated that, in December 2017, the EU27 and the UK had reached broad agreement on the fundamental divorce issues—that is, the future model of cooperation and integration, which has improved chances of reaching a reasonable settlement before the March 2019 deadline. The plan is to have a political declaration on the specifics of future partnership by October this year, while the negotiating parties should have a draft withdrawal treaty ready. He said that we must remember that substantial progress has yet to be made on the details of the separation issues while a sufficient transition period is also not assured yet. Even the no-deal scenario remains a possibility. The private sector and authorities must prepare for a no-deal scenario starting March 2019. Also, it is not that unlikely that there will be no free trade agreement for financial services—or other services sectors. This would mean that the EU and the UK would trade under rules set by the World Trade Organization—where services sectors are only thinly covered. Service providers would then have to apply for comprehensive licenses in both jurisdictions and have all the necessary elements of a fully functioning bank ready in both places. The point of reference has changed since the Brexit vote. Where it was the single market and passporting, it is now trade agreements with third countries that do not accept the legal jurisdiction of EU.
"At the end of the day, the decision about the future for financial services will be a political one. But, in any case, it is important that we all work together to find pragmatic solutions under any kind of framework. And a lot of difficult tasks lie ahead of us – for financial firms as well as for central banks and supervisors," said Dr. Dombret. He clarified that there is no alternative to timely preparation, which holds for all the affected businesses and particularly for the financial sector. Financial institutions should not fall prey to a false sense of certainty that, come what may, there will be an agreement and that they will have sufficient time left to adapt to the new framework. The economic consequences of insufficient preparation in the event of a hard Brexit would far exceed the costs of proper preparation. He advised banks not to slow down in their preparatory efforts because of a vague possibility of a transitional period. Andreas Dombret stated, "Whatever political decision is taken, bank supervisors will not only do all they can to make the transition to a new regime as smooth as possible; they will also, in the long run, try to reduce unnecessary inefficiencies where possible." PRA had published a draft proposal for a post-Brexit supervisory approach in Decermber 2017 and the proposal reflects a solution-oriented, pragmatic, yet stability-oriented approach. Similarly, SSM has also developed pragmatic, cooperative policy stances on many of the relevant issues.He believes that this cooperative style can be an important contribution toward a smooth transition. In conclusion, he reinforced the importance of working together to find pragmatic solutions that sustain the strong links between the economies and financial sectors. He also said, "I am confident that, even without a financial services agreement, our economies and financial sectors will remain closely integrated."
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