(Bloomberg) -- The European Central Bank said global lenders who set up units in the euro area after Brexit are still too dependent on operations outside the region, a conclusion that may lead some banks to move more staff into the bloc.
The ECB found that 21% of 264 trading desks it reviewed “warranted targeted supervisory action,” according to a blog post on Thursday by Andrea Enria, who leads the ECB’s supervisory board. That will likely lead to renewed pressure for more job moves to the European Union from London. Bloomberg reported the staff-related findings on Wednesday.
A first phase of the desk mapping review, which started in 2020, “found that the incoming banks do not yet retain full control of their balance sheets,” Enria wrote. “For the desks identified as material, we will issue individual binding decisions to the incoming banks.”
Almost six years after the UK voted to leave the EU, banks are still sparring with regulators over the structure of their business in the bloc. While many investment banks are reluctant to shift away from London given its deep liquidity and talent pools, the ECB wants to have oversight over the financial risks for the European Union that are embedded in the balance sheets of global banks.
Global lenders have already shifted hundreds of billions of dollars in assets and thousands of jobs from the City of London to locations such as Paris, Frankfurt, Dublin and Amsterdam. Still, that’s a fraction of some estimates made shortly after the vote.
The first phase of the review focused on 264 desks across seven banks and their affiliated investment firms, Enria wrote. Some 70% of the desks included in the review continued to manage some or even all of the EU trading risk from outside the bloc.
To address the deficiencies, Enria says that the ECB may require the relevant firms to:
- Appoint a head of desk within the euro area unit with “clearly defined reporting lines and a compensation structure linked to the performance of that entity”
- Ensure the desk has the adequate infrastructure and number and seniority of traders to manage risk locally
- Establish a “solid” governance and internal control framework of remote booking practices with parent affiliates
- Ensure limited reliance on intragroup hedging
Enria said that the ECB isn’t setting specific targets for the relocation of banking business to the euro area. Rather, it is about ensuring that the banks have the commensurate governance and risk management arrangements for the risk they originate, he said.
“The ECB is navigating uncharted waters,” he said. “No major supervisor has ever had to assume, over a short period of time, the integration of a significant number of incoming institutions with global market activities belonging to groups headquartered in third countries in its supervisory remit.”
Nor does the review mark the end of ECB scrutiny.
“Investigations into credit risk-shifting techniques, the reliance on parent entities for liquidity and funding, and internal model approvals are still ongoing,” Enria wrote.
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