Brexit To Bring ECB Scrutiny To Bear On Banks

Brexit backlash?

Banks should brace for more focus – at least from the European Central Bank – on capital structure and liquidity as Brexit looms and takes effect.

American Banker reports that as several banks shift operations away from the United Kingdom and establish a greater presence on the continent, there will be more focus on risks tied to those banks, and greater attention paid to assets and liabilities.

The disclosure comes as Ed Sibley, a member of the ECB’s supervisory board, told the publication that firms such as Bank of America and Barclays will be assessed “as early as possible this year.” Those banks, as has been reported, have opted to bring their EU headquarters to Dublin. Financial Times has estimated that as many as 27 firms have committed to bringing staff or operations to Ireland in the wake of the 2016 vote to leave the European Union.

Amid a closer look at capital structure and needs, the bank may impose higher capital requirements, which in turn may impact lending activities or ability. The examination is not without precedent, of course – in 2014, the ECB found that there was a roughly $28 billion capital shortfall.

The examinations would look at, among other things, level 2 and level 3 assets found within investment banks, which may be illiquid. These assets tend to be “opaque,” said Sibley, adding that these have been areas of concern in the past.

This time around, the stage has been set for what Sibley said would be a “rigorous process,” taking into account that in the sector, there is “more friction than there was before Brexit.”

As has been widely reported, on Thursday (Feb. 14) the UK Parliament rejected yet another Brexit plan offering in a vote viewed as procedural, which also included an amendment to avoid a no-deal Brexit.

Sibley said that among the different Brexit scenarios, and with an eye on Ireland, if a hard Brexit is in the offing, assets that might be transferred there from the U.K. might be a “bit more than if there is a deal that is done” – though he noted, too, that even in the event of a no deal Brexit, “from a financial stability perspective, it is in the realm of the manageable.”