The Bank of England’s City watchdogs today warned of “tensions” with their European counterparts over the direction of regulation after Brexit.
Sam Woods, the Bank’s deputy governor in charge of the Prudential Regulation Authority, told MPs on the Treasury Select Committee there is a “point of tension” concerning requirements for wholesale and investment banking to establish subsidiaries.
European investment banks with operations in the UK and vice versa can currently operate with a branch – a situation the Bank of England wishes to continue – but EU regulators have expressed their desire for subsidiaries, Woods said.
Banks working across borders dislike the idea of establishing full subsidiaries, which must hold more capital separately from the parent company, making banks less profitable. However, regulators believe they are safer during a crisis, and make disastrous capital flight less likely.
The Bank of England wants retail banks to continue to operate as subsidiaries, but wholesale banking is inherently more cross-border, Woods said. Bank of England governor Mark Carney said before Christmas that EU banks will be able to operate as branches in the UK with or without a Brexit deal.
He added that EU regulators have a “mindset that is more local, more ringfenced, more like what we do for retail, for everything” because they do not share the UK’s history as a global financial centre.
“Our perspective is basically retail activity both insurance and banking should be local, should be ring-fenced should be in subsidiaries,” Woods said. “Wholesale finance is naturally cross border and we should find ways to make that work.”
However, Woods repeated his earlier warning that failure to reach a political agreement on a Brexit transition deal by the end of the first quarter (Q1) will be damaging. Firms desire a transition deal to be able to continue to trade after March 2019, until a longer-term trade deal is agreed – although firms are already moving jobs out of London.
“If we get to the end of Q1 and a transition period has not been agreed then I think we can expect those activities to go up aanother gear – and they’re already in a reasonably high gear,” Woods said.