IGTA Journal - Summer 2018

– remains possible at any time throughout the entire process, enterprises should be prepared for this. That is why we banking supervisors are so concerned that a number of banks are easing off in their efforts to establish a licensed and operational entity in the EU or UK in good time ahead of March 2019. Let me say in no uncertain terms that these institutions cannot rely on our leniency. We expect all banks to make provisions for a hard Brexit. And that’s why I would strongly urge all institutions to make the necessary preparations to keep their business operations running even if there is a hard Brexit on 29 March 2019. Institutions that submit an application after the end of the current quarter will find that the likelihood of their licensing procedure being concluded in time will diminish considerably. We also expect these applications to satisfy our supervisory policy stances. Let us take a brief look at the key aspects.  First, there are the principles for authorisation and for governance, risk management and outsourcing. In essence, the several hundred pages of requirements boil down to this: “empty shells” will not be permitted. Banks in the euro area must be able to manage all their material risks independently and locally. To achieve this, they need to have control over their books and all their positions, and have locally independent governance and control functions that report to the local board of management – particularly in the areas of risk management, compliance and internal audit.  That brings us to the question of booking models. Will back-to-back hedging still be accepted? Here, the SSM expects banks in the euro area to have sufficient local capacity to manage at least an evident portion of their euro-denominated business themselves and not to fully outsource it to other entities within the group. The local entities have to be established in the local market, to ensure that, in the event that other group entities fail, they can participate in the market autonomously. However, we at the Bundesbank naturally see the economic advantages of back-to-back hedging. To some extent, transactions such as these serve as a pipeline to international capital resources at other locations.  Some parties are hoping for an overarching supervisory or legal solution to the issue of the continuity of financial contracts. In response, I warn against relying on us for this, as it is not so much a supervisory issue as a civil law problem.  One very important issue – and not just for foreign banks – is the supervision of future third-country CCPs from the UK. In the Bundesbank’s view, there have to be clear rules and safeguards here ensuring that continental European authorities have both sufficient rights to obtain information and robust powers of intervention in respect of UK CCPs – otherwise, it seems a relocation to the EU would be all but unavoidable. The more we look at the whole issue, the more clearly we can see just how serious the repercussions will be when CCPs we consider to be systemically important leave our jurisdiction. Volker Brühl from the Center for Financial Studies gave a systematic summary of many aspects in a recent study on the topic. He set out and simulated with painstaking accuracy the implications of problems at a third-country CCP for: o monetary policy transmission in the euro area, o the functioning of our resolution regime, o having recourse to national central banks, especially the Bundesbank, as a lender of last resort. These scenarios, over which I would have no supervisory influence whatsoever, fill me with increasing unease. IGTA eJournal | Summer 2018 | 24