One of the most senior staff of the Bank of England that is in charge of banking regulation has warned that the European Union and Britain need to make progress on a Brexit transition deal by Christmas or risk witnessing banks and financial firms leave.
“I struggle to see an outcome in which banks and insurers do not get harder to supervise and harder to resolve for all involved,” said Sam Woods in a speech on Wednesday evening. Wood is the chief executive of the Prudential Regulation Authority (PRA) which is an arm of the BoE.
“If we get to Christmas and the negotiations have not reached any agreement on this topic, diminishing marginal returns will kick in. Firms would start discounting the likelihood of a transition in the central case of their planning,” Woods informed the audience at the City Banquet at Mansion House.
“Some form of transition or implementation period” is the “most important” result of Brexit discussions for the PRA, said Wood.
Concerns regarding securing a transition deal are driven by the fact that there is a need for banks to make final decisions about transferring staff by the first quarter of 2018 at the latest. To set up fully functioning branches and subsidiaries in Europe to maintain uninterrupted EU activities, banks will require at least a year, if not longer.
Without some clarity regarding future arrangements, banks will look to their worst-case contingency plans, which are usually believed to involve large-scale staff moves.
Goldman’s Frankfurt ‘contingency plan’
The speech of Thomson ReutersWoods coincided with an announcement that was made by Goldman Sachs late on Wednesday that it has taken new office space in the German financial centre of Frankfurt as a preparation for Brexit.
“Goldman Sachs has signed a lease agreement for the upper floors of the Marienturm in Frankfurt, a new office tower currently under construction,” said the bank in a statement.
“This expanded office space will allow us to grow our operations in Germany to continue serving our clients, as well as provide us with the space to execute on our Brexit contingency plan as needed.”
The added space signifies that Goldman will be able to raise the number of staff that it has in the German capital from around 200 to around roughly 1,000. Currently, the bank employs around 6,500 people in the United Kingdom.
Goldman has been one of the most vocal banks that are lobbying British authorities for a long-term Brexit transitional deal that would give financial firms time to adjust to the possible substantial changes in the regulatory framework.
Woods said that the Bank of England is especially concerned about regulating two areas of the financial services sector — derivatives and information sharing. He informed the audience of politicians and bankers:
“We are also engaging with financial institutions, trade bodies, the FCA and the government to unpick cross-sectoral problems. The two uppermost in our mind are the need to ensure that existing insurance and derivatives contracts can continue post-Brexit, and that data can be shared within groups across the UK/EU27 border.”
Woods added that it would be “messy and difficult for all firms to try to self-solve for these risks and I hope that we can find suitable fixes as the Brexit negotiations progress.”
The words of Woods came just a day after the Financial Policy Committee of the Bank of England — of which Woods is also a member — warned regarding the “significant risks” that can be faced if the EU mandates that the clearing of derivatives and other financial instruments is transferred out of London after Brexit.