ECB review of capital models will aid euro zone wooing of London banks

A European Central Bank push to iron out differences in how banks calculate capital requirements will inadvertently help the euro zone in its bid to attract banks from Britain after Brexit.

Foreign banks in London say they will shift some operations to the euro zone if that is the only way they can serve customers on the continent after Britain leaves the European Union.

Reuters reported on Wednesday that Goldman Sachs is considering relocating some operations from London to Frankfurt to qualify for supervision by the ECB and thus ensure it can continue selling services to clients in the euro zone and wider EU post-Brexit.

Paris, Milan, Luxembourg, Dublin and Madrid are also wooing banks in London. Lenders, however, have worried that euro zone regulators don't have enough experience in approving or understanding the models big banks use to work out how much capital they must hold.

Nor do they have enough staff to issue approvals in a timely way - especially if a queue of lenders from London creates a logjam, bankers say.

This, they say, limits the range of cities they can move operations to - something the ECB has been trying to rectify.

Last December the central bank quietly launched a project called "targeted review of internal models", or TRIM, to assess the reliability and comparability of banks' models.

Big banks like Goldman typically have models to cover different risks, such as the potential for loans on their books to default. It can take a year to two years for regulators to vet their use.

TRIM dovetails with the work by global regulators at the Basel Committee to stop what they see as some banks calibrating their models to downplay the amount of capital needed.

The ECB said in March that a network of senior model experts from national banking regulators and the ECB has been established to steer the TRIM project.

"TRIM foresees on-site investigations of selected credit, market and counterparty credit risk models from 2017 to 2018 (or to 2019, if the project is extended for credit risk)," the ECB said in March.

Outside consultants will also reinforce numbers.

The ECB, which declined a request for comment for this story, now has several dozen staff focusing on models.

"Model approval will be one of many issues for banks thinking of relocating after Brexit, but I am not sure it's the most significant," said Thomas Huertas, a former banking supervisor in Britain and now chair of regulatory partners at EY consultancy.

"They (the ECB) have built up their model evaluation capacity quite considerably and it has the side effect that they would be prepared for potential additional reviews. In some cases the banks will have the same model in two jurisdictions," Huertas said.

The ECB, could, for example grant a temporary waiver to a bank whose model has already been signed off by UK watchdogs, to speed things up.

STREAMLINING APPROVALS

An official at a U.S. bank said lenders hope that regulators on the continent would either come up with a streamlined approval process for their models, such as by accepting for a set period the model approval already given by UK regulators.

"That's behind the scenes and no one talks about it, but it is quite intensive," the official said.

As the euro zone sizes up opportunities presented by Brexit, French President Francois Hollande has gone further, saying that clearing of euro-denominated financial transactions in London should be moved to the euro zone after Brexit.

"I think there will be considerable encouragement to do what one can to facilitate bringing euro business to the euro zone and I can't see this falling down due to not having enough resources to approve models," Huertas said.

The ECB's efforts to help national regulators impose consistency across models will be backed up by the EU's European Banking Authority, which is harmonizing how supervisors across the bloc approach models.

National supervisors vet models for banks with assets under 30 billion euros ($33 billion), and the ECB vets banks bigger than that.

However, the ECB sets out procedures and guidance for all model approvals across the euro zone, and can intervene in any euro zone lender if it suspects inconsistencies.

Last week the ECB announced that U.S. bank Citi's Irish unit had passed its health check, paving the way for direct supervision by the Frankfurt-based central bank.

(Additional reporting by Anjuli Davies in London and Olivia Oran in New York, editing by Susan Fenton)