International investment banks could have as little as a year to overhaul their European Union branches and shift sufficient staffing and other operations to the EU as the bloc’s regulator ramps up activity to crush post-Brexit non-compliance.
The European Central Bank has been pushing banks to bulk up on the continent since the Brexit vote, shutting down loopholes to ensure that lenders shift more staff and key functions to the continent as part of its so-called desk-mapping review.
From January 2023, the ECB will issue binding decisions to banks on what needs to change, according to a person familiar with the matter. Banks will have between 12 and 24 months to comply, they added. The length of time given to reform their business models will vary, depending on the kind of requirements issued.
The ECB’s move comes after its initial assessment found that banks were still too dependent on functions based outside the EU. In a blog post in May, the ECB noted that 21% of 264 trading desks “warranted targeted supervisory action”.
The ECB’s blog post did not mention an exact date for binding decisions, a person close to the situation said at the time they were expected by the end of 2022.
Top bankers, speaking on the condition of anonymity, told Financial News that they were already facing pressure to bulk up on the continent.
“The ECB has certain expectations about what we’re expected to have in the EU to meet their regulatory requirements and have made it quite clear that they want us to have a bigger presence,” the head of European markets at a Wall Street bank said.
Citigroup is bulking up its Paris office under new markets boss Fabio Lisanti, he told FN, while Goldman Sachs, JPMorgan, Morgan Stanley and Deutsche Bank have all highlighted expansion plans in the French capital.
The ECB said in May that empty shells booking business in the EU but relying on risk management from elsewhere remained a “very real concern”, and many of the banks reviewed “do not yet retain full control of their balance sheets”.
The final decisions will force banks to, for example, appoint a European desk head with responsibility for those business lines, shift more senior traders to the bloc, tighten governance frameworks, or roll back from intra-group hedging structures.
FN revealed in September that the ECB had not yet visited banks in person as part of the review, but could do so moving forward.
“We’ve been in conversations with the ECB from the early days, and we know what’s expected of us in terms of people, assets and functions that need to be out there,” a European CEO of a major US investment bank said. “It’s not a big concern for us, but Brexit has made the whole industry more inefficient, and this means that we double up on a lot of functions, which inevitably increases costs.”
However, others familiar with the European banking market say that getting staff to move out of London remains a challenge, as does finding local talent to fill roles in European hubs now it is in greater demand.
“There’s been an ongoing challenge for firms to bulk up their EU operations, which was not helped by the pandemic, and the ECB is applying further pressure through the desk-mapping exercise,” Andrew Gray, global head of Brexit for financial services at PwC, said. “But there are genuine issues around firms’ ability to attract and retain talent in these EU locations and how they think about risk management and pools of liquidity globally.
“The desk-mapping exercise has focused minds in a way they hadn’t been before. Some products that are euro-centric in nature such as government and corporate debt are being moved to European locations, which is inevitably putting more pressure on firms to move people and putting a strain on the talent pool,” he added.
According to a researcher for a financial institution currently reviewing the impact that the desk-mapping review could have on the market, there has been a “relatively significant” increase in talent in Paris, but this has mainly been through local hiring than mass movement from elsewhere.
“It’s a slow puncture,” they said. “London is very attractive for lifestyle reasons. We had this theory that people are moving but what we’re really seeing is the status quo.”