- Bank of England told Deutsche Bank of “significant concern” over UK branch authorisation after Brexit.
- Areas of focus include the lender’s crisis recovery plan and business model for UK branch, according to an internal Deutsche Bank document.
- Regulators have regular meetings with senior Deutsche Bank officials over Brexit planning.
LONDON — Supervisors at the Bank of England expressed “significant concern” to Deutsche Bank in a letter concerning its UK branch authorisation ahead of Brexit, according to a leaked internal document from the German lender.
Key areas of concern for the Prudential Regulation Authority, the supervisory arm of the central bank, include Deutsche Bank’s recovery and resolution planning in a crisis and its overall business model, according to a confidential summary of regulatory interaction seen by Business Insider.
So what does this all mean?
Well, for a start Deutsche Bank’s UK branch, based in London, is one of the lender’s key hubs for markets and investment banking activities. Brexit will likely see a change in the system of agreements that allow these types of European bank branches to operate freely in the UK, meaning the Bank of England will have to authorise each one separately.
Branches are a cheap and easy way for banks to move capital and funding around their group structure, but the benefit for the banks also makes regulators nervous. In the event of a financial crisis, capital and liquidity could be swept back to the bank’s headquarters, potentially leaving UK counterparties out of pocket.
This appears to be the nub of the PRA’s concerns, highlighted by the words “recovery and resolution.”
“The PRA acknowledges the improvements made to UK oversight and governance and appreciates the regular engagement with DB management,” according to the document, which summarises a July 31 letter from the PRA.
“However significant concern remains. PRA has shifted its supervisory priority to focus on preparation for UK branch authorisation and will focus on the areas of most concern — controls, business model and recovery and resolution, alongside known areas of material weakness, including liquidity risk management.”
Here’s how it looks:
Spokespeople for Deutsche Bank and the PRA declined to comment.
Deutsche Bank’s UK Chief Operating Officer Tiina Lee and Chief Accounting Officer Karin Dohm met PRA officials on July 26 to discuss the bank’s Brexit planning, the document shows.
Lee, along with Corporate and Investment Bank Co-Head Garth Ritchie and Chief Regulatory Officer Sylvie Matherat, had a Brexit Planning Update Meeting with the Financial Conduct Authority, the markets regulator, on August 21.
In a letter to bank chiefs in April, PRA head Sam Woods said the regulator “would need to form our own judgements” on the future of EU banks in the UK. A more expensive option for banks would be to operate subsidiaries rather than branches, which are stand-alone entities with domestically-applied capital requirements.
Deutsche Bank is one of many financial institutions going through the Brexit authorization process. Banks need PRA authorisation to carry out activities such as deposit-taking.
Sam Woods, CEO of the Bank of England’s Prudential Regulation Authority, said earlier this year that the regulator received 401 responses to a call for Brexit contingency plans from the firms it supervises. Around 80 are seeking new authorisations, according to a Bloomberg News report last month.
Woods also said the PRA faces a “material risk” to its mandate to supervise banks, and that Brexit places “an extra burden” on the regulator’s resources. The central bank expects a surge in registrations for new entities in the UK, with the financial passport that allows British-based firms to operate in the EU coming under threat.
Last month Deutsche Bank CEO John Cryan told employees that the German lender is preparing for a hard Brexit in which roles will “inevitably” move from London to Frankfurt.
Cryan said in a video announcement on July 11 that the bank “will assume a reasonable worst outcome” from the UK’s talks with the European Union, according to a Bloomberg News report. “The worst is always likely to be worse than people can imagine,” Cryan said.
While Deutsche Bank’s London branch is one of the firm’s major investment banking hubs, Cryan said he will move “the vast majority” of the markets balance sheet to Frankfurt.
Matherat said in April that up to 4,000 roles could move to Frankfurt from London.
“There’s an awful lot of detail to be ironed out and agreed, depending on what the rules and regulations turn out to be,” Cryan said in the video. “We will try to minimise disruption for our clients and for our own people, but inevitably roles will need to be either moved or at least added in Frankfurt.”