Written by 9:50 BREXIT, Financial Centre, Member

European capital markets

The regulatory considerations for banks as they move beyond Brexit – a report by Deloitte in collaboration with IHS Markit.

Brexit became a reality when the Transition Period ended on 31 December 2020, four and a half years after the UK Brexit referendum. The end of the Transition Period came and went without any major disruption to financial or market stability. Nevertheless, major changes have occurred in European capital markets, both in the run up to the end of the Transition Period and following it. And these are by no means at an end. In some respects, we are only at the beginning.

The study by Deloitte and IHS Markit on which this article is based first looks at the effects of Brexit on the European capital markets to date. It then focuses on how future regulatory considerations will affect the influence the development of the European capital markets and what this in turn means for banks’ European footprint, in particular the balance of their activities between the UK and the EU.

Two different scenarios are assumed , based on whether the approach is closed or open. Overall, we assume that the EU’s approach will be more closed than that of the UK’s.
Therefore, it is predominantly the EU’s position that drives the outcomes in each scenario as the UK’s relatively more open approach is closer to the status quo.

Banks will have to address a wide range of questions. about their strategic ambitions, in addition to questions about the viability of business and and operating models. How each bank determines its optimal European footprint will vary considerably depending upon whether it is a RoW, EU, or UK bank, as well as on its existing legal entity structure, distribution of capital markets activities, and strategic and business priorities.How each bank determines its optimal European footprint will differ significantly depending on whether it is a RoW, EU or UK bank, as well as by its existing legal structure, the distribution of capital market activities and its strategic and business professionals.

Nevertheless, the following  three main areas on which banks should focus their efforts in the short short and medium term.

1. Review and optimise legal entity structures

Banks should review and optimise their legal entity structures to ensure that they have the right legal entities, permissions, risk model approvals and infrastructure needed to support their clients, deliver their strategic ambitions, and meet other regulatory requirements (e.g. on resolvability).

2. Optimise the distribution of activities across jurisdictions and legal entities

For any given legal entity structure, banks should look to optimise their balance sheets, including within IPU sub-groups (where relevant), and between UK and EU entities.

3. Identify growth opportunities and align European footprint with global strategy

Banks should look beyond near-term regulatory and supervisory pressures resulting from Brexit and consider the evolving macroeconomic, commercial, and political landscape in order to identify strategic growth opportunities in Europe and beyond.

Looking forward, EU, and to a lesser extent UK, authorities face a choice: whether to proceed with more open or more closed financial services ecosystems. A more open approach between the UK and EU, and between the EU and the rest of the world more generally, will provide more flexibility for banks to achieve a better balance between regulatory and commercial considerations and to provide a broader range of services at lower cost to their customers.

You can download the report here.

Image: Paul Fiedler / Unsplash

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