ECB Supervisors See Increased Risk from Brexit Banks

One of the European Central Bank's top supervisors warned Thursday that banks quitting London after Brexit could create risk by playing off EU countries' regulatory regimes against one another.

"Some banks may choose to undertake significant activities through third-country branches or investment firms. Such legal structures are currently outside the scope of European banking supervision," Sabine Lautenschlaeger told representatives from around 20 British and international banks at a Frankfurt meeting.

Using such models for a new presence in the 19-nation eurozone would mean banks were subject only to national regulators, not the umbrella supervision system led by the ECB.

"Do I see a risk in such a fragmented approach? Yes I do," Lautenschlaeger said.

To prevent financial firms exploiting differences between different countries' systems, Brussels has launched a review of its rules, aimed at allowing ECB supervisors insight into a banking group's whole business.

British Prime Minister Theresa May launched two-year EU exit negotiations at the end of March -- which could see London banks lose "passporting" rights to sell services to clients on the continent.

Many financial firms are now looking to cities in the eurozone, where setting up a European presence -- or extending an existing one -- will let them dodge the Brexit bullet.

Lautenschlaeger reiterated that banks should be quick to apply for EU licenses, as approval can take up to a year, leaving little time before the March 2019 deadline to get their affairs in order.

Movers will also be obliged to set up what the supervisor called a "real" bank, with "adequate local risk management, sufficient local staff and operational independence" from the rest of the group.

Lautenschlaeger also rejected the idea of recognizing banks' internal models -- used by lenders to judge the risks they are exposed to -- if they had already been approved by British authorities.

"It is not feasible from a legal point of view, and it would also not be the most prudent thing to do," she said.

Nevertheless, she added that "there will be a limited period of time in which banks might be allowed to use internal models that have not yet been approved by the ECB," acknowledging that "time is short."