Europe Seeks Crack Down on Brexit Bank Arbitrage

By FeaturesDow Jones Newswires

The European Central Bank should take charge of regulating big investment banks in the eurozone, according to a proposal to be presented by the European Commission, the latest move to stop individual European countries from luring Brexit-hit banks with the promise of looser rules.

Currently, banks' European broker-dealer operations are overseen by a patchwork of national authorities. The commission, the EU's executive arm, wants to forestall local regulators from offering sweeteners to entice large investment banks like Goldman Sachs and J.P. Morgan as they search for new EU bases after the U.K. quits the trading bloc.

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The proposed rule is expected to be presented Wednesday, a person familiar with the matter. It will be subject to approval by EU countries and lawmakers, according to officials.

On Monday the ECB said it would pay "special attention" to banks' Brexit plans to ensure they don't just set up shell companies in the euro area. Bankers want to keep as much as possible in London after Brexit to avoid having to create duplicate offices in Europe. But ECB officials want guarantees that the new European hubs are well capitalized and have compliance staff on-site.

Privately, authorities in some EU countries have shown relief that the ECB is ready to step in, citing better preparedness of the central bank to deal with complex investment banking issues over domestic regulators.

If the commission proposal is approved, the definition of "credit institutions" supervised by the ECB may have to be enlarged to include the investment banks, which don't take deposits and lend like regular banks, according to an opinion issued by the ECB last month. Current rules state that among other things, banks with over EUR30 billion of assets are directly overseen by the ECB.

The ECB has already taken a hard line, demanding that banks move substantial numbers of staff and capital into their European hubs. It has also been less inclined than local regulators to let banks to flip risk back into their London entities in the years right after Brexit, a move that would reduce the amount of capital they have to shift into their EU offices.

"We will oppose any race to the bottom in supervisory standards," Sabine Lautenschläger, vice chairman of the ECB's banking supervisor arm has said.

The ECB has played tough cop before. In 2014 it took over regulation of eurozone banks to address fears local regulators were too relaxed with their lenders and missed problems that ultimately caused some to collapse during the financial crisis. At times, however, the institution has been accused of stepping over its remit.

In October, its plan to require banks to fully provision for unsecured new loans deemed nonperforming faced a backlash by European lawmakers, who said legislators -- not technocrats -- should make the rules.

While the EU has been moving forward with a banking and capital markets union, Brexit has created a sense of urgency, because the bloc gets ready to lose its most important financial services player.

Several investment banks have signaled they will set up enlarged offices outside London amid expectations they will lose the right to serve customers across the continent from the city. Citigroup, Nomura and Morgan Stanley are setting up hubs in Frankfurt, while Goldman Sachs has chosen both the German city and Paris.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com and Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

December 19, 2017 09:06 ET (14:06 GMT)