Brexit will make it harder to wind down firms and supervise financial services, a key Bank of England policymaker has warned.
Sam Woods – who serves as a deputy governor at the Bank and chief executive of the Prudential Regulation Authority (PRA) – said banks which have been using the UK as a hub for their EU operations are becoming more “complex” as they roll out Brexit contingency plans.
He said those changes will ultimately make it harder for the PRA to oversee financial services in its jurisdiction.
The PRA chief also used a speech prepared for the Mansion House City Banquet to announce that international banks with retail operations in the UK will probably have to convert to subsidiaries after Brexit in order to create a safety net equivalent to domestic ring-fencing requirements, which are meant to protect consumer cash from investment banking risks.
Mr Woods said that while the decision was subject to Brexit negotiations, it should be “no surprise given our existing policy”.
A number of banks have already been restructuring their UK and EU operations in order to comply with the expected loss of passporting rights between Britain and the bloc, forcing many firms to “beef up” EU offices or set up new continental headquarters.
UK-based banks have been working on Brexit contingency plans (PA)
“Contingency planning is a sliding scale of increased commitment, investment and momentum through time. It is much more prudent and prosaic than hovering over the relocate button or rushing to the exit door,” he said.
“But restructuring by firms will in general increase their complexity.
“I struggle to see an outcome in which banks and insurers do not get harder to supervise and harder to resolve for all involved,” he added.
The warning is particularly poignant given that the PRA is responsible for supervising around 170 international banks from over 50 jurisdictions, the sum of which hold assets worth more than twice the UK’s annual gross domestic product (GDP), Mr Woods said.
The firms it oversees notably include “every single foreign global systemically important bank” which is more than “any other EU country” currently supervises, he explained.
Mr Woods also announced plans that would force UK banks to prove they can handle international regulations that may require a notable portion of their capital to be held in an overseas subsidiary – while still meeting domestic capital requirements at home.
He said risks could arise if firms meet those requirements by raising external debt, an activity known as “double leverage” and which carries inherent risks.
“Servicing double leverage relies on flows of dividend income which are uncertain and at the discretion of local boards and supervisors across the group.
“The parent (firm) might be incentivised to under-allocate resources to unregulated but risk-taking entities within the group,” Mr Woods explained.
“We need to be mindful of the risks this can create.”
The Bank is now launching a consultation on its plans to manage “double leverage” risks, which will be open until January 4 2018.