Too many global investment banks continue to serve euro zone clients out of London and the European Central Bank plans to force them to relocate senior staff and trading activity to the bloc, ECB supervisory chief Andrea Enria said on Thursday.
The ECB has long battled the industry’s biggest players, who are reluctant to relocate activities after Brexit, despite explicit demands by the ECB, which supervises the bloc’s biggest financial institutions.
In a sign that patience is wearing thin, Enria said the ECB will issue “binding decisions” to key investment firms, prescribing action on a case-by-case basis.
“We want to ensure that incoming legal entities have onshore governance and risk management arrangements that are commensurate, from a prudential perspective, with the risk they originate,” Enria said in a blog post. “The extent of the actual
relocation and specific booking configuration will depend on the current set-up of each bank.”
Banks could be required to appoint a head of trading desk within the euro area legal entity or may be asked to ensure the desk has the adequate infrastructure and number and seniority of traders to manage risk locally, the ECB said.
They could also be asked to establish a solid governance and internal control framework of remote booking practices and to ensure limited reliance on intragroup hedging.
Of the trading desks assessed by the ECB at seven key institutions, around 70% still used a back-to-back booking model, a frowned upon practice in which a firm transfers risks to a third party or to another intragroup entity which then hedges it.
It also concluded that 20% of desks were organised as split desks, in which a duplicate version of the primary trading desk located offshore is established within the euro area legal entity to manage the part of the risk originated there.
These practices remove risk management expertise from the euro zone entity, leaving the local unit vulnerable in case of market turbulence.
“It is our duty to protect the depositors and other creditors of the local legal entity, prevent the disruption of banking services and safeguard broader financial stability in our area of jurisdiction,” Enria said.