The European Central Bank has told the biggest Wall Street and City of London investment banks to bulk up the “empty shell” trading desks they set up in the eurozone after Brexit to reduce their reliance on operations outside the bloc.
The move ramps up the ECB’s long-running push for global banks based outside the EU to increase the staff and capital they commit to financial market operations in the eurozone.
Andrea Enria, head of supervision at the ECB, said in a blog post on Thursday that “empty shell structures . . . are a very real concern”.
“The ECB is not setting specific targets for the relocation of banking business to the euro area,” he said. “Instead, 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.”
Since Brexit, global banks have had to split their European businesses, most of which they previously located in London, shifting hundreds of billions of dollars in assets to expand their operations in cities such as Paris, Frankfurt, Amsterdam and Dublin.
However, far fewer jobs than expected have shifted from the City to the EU, defying initial predictions that tens of thousands of positions would be relocated. UK City minister John Glenn last month agreed with estimates that about 7,000 jobs have moved from Britain to the EU since Brexit, saying London “has not experienced the haemorrhaging” many expected.
The ECB granted banks more time to move senior executives to the eurozone due to the disruption of the coronavirus pandemic. But even since travel restrictions were lifted and the central bank stepped up its pressure again, many top traders still seem reluctant to leave London.
By pushing global banks to add more staff and resources to their eurozone offshoots, the ECB risks exacerbating tensions with the Bank of England, where officials have privately expressed concern about a “hollowing out” of UK banking entities.
The ECB’s move follows its completion of the first phase of a detailed assessment — known as a desk mapping review — to establish how widely seven global banks use various techniques to transfer the risk of their eurozone operations outside the bloc, in particular to the UK.
The central bank has been focused on eight global investment banks, one of which it already dealt with in an earlier assessment. They are JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, HSBC, Barclays and UBS.
Out of 256 trading desks at the seven banks it assessed, it found none “retain full control of their balance sheets”. About 70 per cent use back-to-back models, offsetting eurozone trades with entities outside the bloc to manage the risk remotely. A fifth used desk-splitting, managing the risk of eurozone trades jointly from desks both in the bloc and elsewhere.
Enria said “these structures are exposed to heightened operational and counterparty risk vis-à-vis their parent affiliate”, adding that in a crisis they could mean a bank’s eurozone operations are left “with large unhedged positions and little to no access to the staff and infrastructure needed to wind them down smoothly”.
He said the ECB had identified the 56 most material trading desks and would “issue binding decisions” to their parent groups, requiring them to beef up their eurozone operations or face fines if they fail to do so.
In particular, they would be asked to appoint a head of each eurozone trading desk “with clearly defined reporting lines and a compensation structure linked to the performance of that entity”.
He also called for the banks’ eurozone desks to have “adequate infrastructure and number and seniority of traders to manage risk locally”, to put in place sufficient controls for any remote booking and limit their use of financial insurance, or hedging, to cover the risks of eurozone trading from other parts of the bank.
“The ECB is navigating uncharted waters,” said Enria. “No major supervisor has ever had to assume, over a short period of time, the integration of a significant number of incoming institutions with global market activities belonging to groups headquartered in third countries in its supervisory remit.”
