German regulators warn markets on Brexit uncertainty

By Rachel Muller-Heyndyk

18 December 2020

Germany’s supervisory authority BaFin has said that market participants should take all precautions necessary for a possible hard Brexit.

Last week, the Bank of England said that the UK is “well prepared for serious economic shocks” in the event of a No Deal Brexit but warned that disruption to financial services could arise. It said that it could absorb credit losses in the order of £200bn, but that would involve “incredibly severe shocks.”

The BoE has kept its stimulus programme unchanged, leaving its bond buying programme at £85 bn and keeping its benchmark interest rate at a historic low of 0.1 percent.

In response, BaFin stressed that financial stability depended on market participants ensuring they are as prepared as possible.
"Already at an early stage, BaFin has warned the financial market participants to take all precautions necessary for a possible, hard Brexit,” said a representative at the German regulator.

“As of now, the market participants (and the affected companies, in particular) must continue their efforts – not just as a matter of individual companies but also as a matter of financial stability. At least as far as I know, the industry is fully aware of that.”

Once the transition period ends on December 31, banks will lose European passporting rights and will no longer be able to serve customers in the European Economic Area. BaFin confirmed that it had already received a high number of applications from firms hoping to open a branch or establish a business in Germany in response.

However, BaFin president Felix Hufeld said in article that “customer involvement is needed” in the context of relocations. 

“The clock is ticking. Companies should be putting some pressure on their customers – otherwise there will be a significant backlog by the end of the year, and that isn’t good.”

Last month BaFin announced that it will permit UK Funds to submit third-country marketing notifications now, in the hope that this will enable continuity of distribution to the benefit of German investors. 

The European Central Bank also said that it expects UK lenders to move staff and assets to the Eurozone if they want to keep serving the bloc’s clients after the transition period.  Credit Suisse, Citi, and Morgan Stanley have already moved staff to Frankfurt.

“It is important to note that remote working arrangements do not change the fundamental need to relocate staff to the EU,” the ECB said in a regulatory newsletter. 

“Ensuring that banks have a physical presence within the EU to the extent necessary is a prerequisite for achieving prudent risk management and effective supervision.”

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