German regulator raises specter of Brexit cliff edge

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Germany's financial regulatory authority has delivered a grim warning of a possible Brexit cliff edge for British banks if divorce talks between the UK and the European Union fail.

The Federal Financial Supervisory Authority (BaFin) said EU regulators need temporary fixes in place to prevent market distortions in such a case.

Britain’s EU departure in 2019 "certainly won’t be a piece of cake" and given that five rounds of divorce talks have not made enough progress, regulators must assume a "cliff edge situation", Felix Hufeld, president of BaFin, said.

"It’s crystal clear in my mind that whatever the outcome of Brexit, it will cost a price both for British and EU27 consumers. The cost of doing business will go up," Hufeld said.

Regulators will need temporary solutions to avoid dangerous "distortions" in markets while entering the post-Brexit world, Hufeld said at an event in London.

Frankfurt is emerging among the winners in a battle between EU financial centers to attract banks now in London who want to open new hubs in the bloc to continue serving customers there.

Goldman Sachs Chief Executive Lloyd Blankfein said last week after a meeting with Hufeld that he will be spending "a lot more time" in Germany’s financial center.

Banks that want to save costs by managing in London risks from trades undertaken at new EU hubs, known as back-to-back, must have "adequately" trained risk management staff in case this model is no longer possible.

There was also a need to find the right balance for outsourcing hub activities to London, he added.

Reuters Photo‍

Germany’s Deutsche Bank is among the branches of EU banks in London that may have to become a subsidiary, a costly exercise, but Hufeld said this was not the only solution and pointed to the trust between UK and EU supervisors.

Don't screw up

US regulators and financial services firms are worried that measures taken by the EU to curb euro clearing and asset managers in Britain after Brexit will hit them too.

Hufeld said Britain and the EU27 need to be aware of the implications of Brexit measures on the United States and Asia.

"If we screw up, then maybe others will pick up the bits and pieces and both the UK and EU are paying the bill, which I would hate to see happening. Let’s just be prudent," Hufeld said.

Over 95 percent of euro denominated interest rate swaps, widely used by companies to insure themselves against adverse moves in borrowing costs, are cleared by the London Stock Exchange’s LCH arm.

The EU has proposed a law that would, as a last resort, force a UK clearing house (LCH) handling large amounts of euro swaps to relocate to the EU if it still wanted to serve customers based there after Brexit.

It was out of the question that the EU should not have supervisory access to the LCH, but Hufeld cautioned about "jumping to seemingly easy solutions" like relocation without first understanding the consequences.

Source(s): Reuters