LONDON (Reuters) – The Bank of England said on Wednesday it planned to spare European banks costly extra capital rules once Britain left the EU, but warned of “consequences” if Brexit talks turned sour.
Setting out its position for a tussle with Brussels over London’s status as a global financial hub, the BoE said keeping Britain open to foreign banks after Brexit was key for economic growth at home and beyond.
Bank of England Governor Mark Carney said big European banks operating in Britain would face little change, as long as their supervisors in the European Union cooperated with London after Brexit.
“But we retain all our options and if that is not forthcoming there will be consequences for those institutions,” he told lawmakers shortly after the BoE plan was published.
Deputy Governor Sam Woods said cooperation had worked well to date. “However Brexit is throwing up a point of tension which I think will probably build rather than subside.”
The BoE’s announcement, which was backed by Britain’s finance ministry, was a first salvo in an expected struggle with the EU over banking rules that will decide the long-term fate of London’s lucrative financial centre.
Prime Minister Theresa May has said Brexit will entail leaving the EU’s single market, raising questions about how British companies will do business in the bloc and European ones in Britain.
A bitter British divorce from the EU would make cross-border supervisory cooperation harder and potentially hurt banks with a big London presence, such as Germany’s Deutsche Bank.
The BoE said it would allow larger banks – for example, with assets of more than 15 billion pounds in Britain – to operate as branches in the UK only if their home supervisors agreed to cooperate more closely with the BoE.
Otherwise, they would be classed as subsidiaries, which would require them to park costly extra capital in Britain.
There are 77 branches of banks from the European Economic Area in Britain – 23 of which have assets of around or above 15 billion pounds – plus 80 branches of insurers.
The BoE’s proposal indicated a softer British position than that of the EU. It has so far insisted that London-based banks will lose their free access to EU banking markets if Britain sticks to its plan to impose new controls on migration, which is popular with British voters but would breach one of the conditions for membership of the single market.
But Carney said the two sides had a lot in common and sounded upbeat about prospects of a deal.
“I don’t accept the argument that just because it hasn’t been done in the past it can’t be done in the future,” he said.
London vies with New York for the title of the world’s financial capital. It dominates the $5.1-trillion-a-day global foreign exchange market and is home to more banks than any other centre. But many other EU capitals see Brexit as an opportunity to grab new business.
The EU has already proposed that clearing of euro-denominated derivatives, done mainly in London, could move to the euro zone if there is no comprehensive Brexit deal between EU and UK regulators.
The BoE’s conditions on whether branches should become subsidiaries will be seen as a riposte the euro clearing plans in Brussels, which also emphasises the need for strong supervisory cooperation to avoid forced relocation.
The tough EU line on banking is extremely sensitive for Britain which collects over 70 billion pounds a year in tax from the financial services sector.
EARLY 2018 START
The Association for Financial Markets in Europe (AFME), a group representing European banks, welcomed the BoE’s announcement for providing clarity and allowing banks to get on with their planning for Brexit.
The BoE plans to start the process of reauthorising the branches of up to 200 EEA financial firms in Britain in early 2018. It hopes Britain will secure a Brexit transition deal to start after Brexit in March 2019 to give regulators more time.
The new policy will not affect banks from outside the EU.
The central bank said retail-focused branches of EU insurers currently operating in Britain will need to become subsidiaries, in line with an existing rule for foreign retail banks.
The BoE will also get powers to “recognise” and supervise clearing houses from the EU after Brexit.
The emphasis on close supervisory cooperation broadens the focus of Brexit negotiations over the financial services industry away from specific post-Brexit financial rules.
Britain wants to avoid becoming a “rule taker”, required to follow news EU regulations indefinitely.
Management consultancy Boston Consulting Group estimated that EU banks would have to find up to 40 billion euros if all their branches in Britain were turned into subsidiaries.
Deutsche Bank has 9,000 staff in London. France’s BNP Paribas and Societe Generale have 6,500 and 4,000 respectively.
Additional reporting by David Milliken and Andy Bruce; Editing by Guy Faulconbridge and Robin Pomeroy