ECB warns banks to curtail booking trades and loans in UK after Brexit

The European Central Bank has warned banks they have a maximum of three years after Brexit to curtail their use of a “back-to-back” booking model that makes it easier to keep staff and capital in the UK.

A “back-to-back” arrangement allows trades and loans processed in the EU to be booked in London, where the risk would be managed and the capital and liquidity held. 

Three people familiar with the situation said the ECB had written to financial institutions and told them to limit their reliance on back-to-back booking models by 2022. 

Using it, 15 of the UK’s biggest international banks expect to have to move less than 4,500 roles — or less than 6 per cent of their UK workforces — to the continent immediately after the UK leaves the EU in March 2019. 

Regulators have given mixed messages about whether the model is an acceptable one.

Andrea Enria, head of the European Banking Authority, recently said there was no “ban” on back-to-back trading after Brexit, but the ECB, which became the eurozone’s top bank regulator in 2014, is taking a tougher stance. 

The ECB’s letter spelling out a three-year deadline was the first hard indication of what would be acceptable. “Subsequently, they’ve told us they want to see a lot of it phased out sooner [than 2022],” said a policy expert at one of the big international investment banks.

The ECB is not attempting to eradicate back-to-back booking altogether, but it does want to clamp down on banks using the model to keep their London operations intact while using “brass plate” trading entities in the EU.

An executive at another large bank said employees had been told they should limit back-to-back from day one after Brexit, which is scheduled for March 2019. A third said that after receiving the letter, bankers had been told they only had a “couple of years” to reduce their reliance on back-to-back. 

“The ECB has been getting a lot tougher on back-to-back arrangements in the last few weeks,” said a senior executive at a fourth bank. “When we talk to them about using back-to-back structures on day one of Brexit they say ‘OK’, but they want us to tell them exactly what our two-year plan looks like in terms of capital, liquidity, people, risk management and compliance”.

The ECB’s intervention is sensitive because it will not technically supervise the “investment firms” that house banks’ trading business until the European Parliament and European Council adopt an accord on investment firm supervision presented by the commission last December.

An executive at a eurozone bank said the ECB and its own national regulator were already leaning on his firm to do its derivatives business with other eurozone entities, instead of UK-based investment banks. 

The ECB’s resistance to back-to-back booking models stems from a fear that banks will create “brass plate” operations where substantial business is done in the eurozone but those eurozone entities lack the resources to deal independently with a crisis. Banks argue that back-to-back is a normal part of international finance and is already used in lots of cases, including repatriating risk from Asian trading operations to London.  

The ECB declined to comment, as did Goldman Sachs, Citigroup, Bank of America Merrill Lynch, Morgan Stanley, JPMorgan Chase, Barclays and UBS. 

Additional reporting by Claire Jones in Frankfurt