Concerns Raised Over Lack Of Adequate Preparation By Banks As Brexit Looms

Out of about 40 banks whose European operations are headquartered in London, fewer than ten have applied for a license to enable them continue their banking business in the European Union after the United Kingdom quits the bloc. This is according to regulatory sources who spoke to Reuters.

Consequently the lack of preparation is causing concern at the top banking supervisor in the European Union – the European Central Bank. Fears are rife that some of the financial institutions have not made adequate preparations for Brexit and loopholes may help some of them avoid the ECB’s watch. The ECB has also previously said that time is running out for banks with regards to preparations in the aftermath of Brexit.

“A number of the larger banks have made progress in their planning. But we have not seen many final decisions yet,” an ECB representative, Sabine Lautenschlaeger, said last month.

Dublin or Franfurt

In the last two months the number of financial institutions indicating they will establish new subsidiaries in the European Union after Brexit has increased. Most of the major Japanese, British or U.S. banks have said they will be setting up units in Dublin, Ireland or Frankfurt, Germany. However, formal license applications are few according to supervisory sources.

Though the United Kingdom will not exit the European Union until early 2019, executives at financial institutions have indicated that there is little time left since setting up new subsidiaries could take as much as 18 months. This is because of the need to change the contractual arrangements the banks have with their EU clients as well as the need to acquire and deploy the necessary technology. Relocating employees or recruiting others is also a time-consuming process. It also takes between half a year to a year to get a banking license.

‘Hard Brexit’

While Britain negotiates its exit from the bloc, one of the major issues that is emerging is the fact that most investment banks have their headquarters in London. According to the Bank of England, about 50% of all the equity and debt issued in the European Union involves UK-based financial institutions.

A warning has thus been issued by big banks that a ‘hard Brexit’ has the capacity to trigger financial instability in the event that access to European Union markets was suddenly lost. The banking industry group last week said that central banks should make preparations to ensure that they are ready to offer support to the financial markets to ensure stability.

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