ECB comments on Brexit transition period, intends third country “flexibility”

The precise content of the withdrawal agreement will not be known until late 2018. Uncertainty remains, including the risk that the agreement might not be ratified by all sides involved in the negotiations. In that case, there would be no transition. The ECB therefore expects banks to continue preparing for all possible contingencies. Banks are responsible for taking the necessary steps to obtain all authorisations required for them to carry out their activities in a timely manner to make sure that they can continue to serve their customers after 30 March 2019.

There are legal implications that banks will need to consider when the UK becomes a third country, meaning a country that is not a member of the EU. They should be aware of the consequences, for authorisation to operate in the UK and the EU, of losing the “EU passport”. Furthermore, arrangements which may affect the ability of banks to develop independent risk management and control frameworks will have to be re-assessed by the supervisor. The prudential treatment of certain third-party exposures and the continuity of contractual arrangements between certain parties established in the EU and UK will also be affected.

Independently of any transition period resulting from a political agreement, the ECB and national supervisors recognise the challenges that incoming and euro area banks are facing to adapt to the new situation after the UK leaves the EU. The ECB has already communicated its intent to provide flexibility to enable banks to meet certain supervisory expectations and build up their capabilities in the euro area. The ECB and national supervisors do not plan to change this approach, which is however limited to those elements within the scope of supervisory expectations.

During this so-called “build-up period”, which will be discussed on a case-by-case basis, the ECB and national supervisors may allow more time for banks to meet certain supervisory expectations regarding their local risk management capabilities and governance structures, and to move to an adequate and balanced business organisation within the euro area. On the basis of detailed and reasonable business plans for all euro area operations and a clear understanding of the banks’ long-term target operating models, the ECB and national supervisors will determine when banks should meet certain supervisory expectations and how much flexibility can be provided. The arrangements should in no case endanger robust internal governance and sound and effective risk management, or mean that capabilities and controls are “running behind the business”.

Read the full statement

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