LONDON — One of Germany’s most senior central bankers warned against a “race to the bottom” for financial regulation in Europe, fearing that Brexit could spur governments to undo key regulation put in place since the financial crisis.
Dr Andreas Dombret, who sits on the executive committee of Germany’s central bank, said at an event in London on Friday: “My main message here is that we must avoid a regulatory race to the bottom at all costs.”
“Given how the Brexit debate developed early this year, this warning is not at all an empty one. A financial centre strategy comprised, among other ingredients, of very low corporate taxes and lax regulation has already been mentioned in the UK as a fallback option for London.”
Both Prime Minister Theresa May and Chancellor Philip Hammond have suggested that Britain may lower corporate tax rates in a bid to retain business and attract more business to Britain after it leaves the European Union.
Dr Dombret suggested that this could lead to a more general relaxation of regulations to keep Britain competitive. He warned: “The current regulatory and supervisory standards we have set together are an important lesson from the financial crisis and it would be a mistake to roll them back. I am convinced that in the long run, well-capitalised and strictly supervised financial systems are the most successful ones.”
The German central banker said he is not just concerned about a roll back of regulation in Britain but across the EU. He said: “To be clear, my call to refrain from using regulation or supervision for the sake of increasing one’s competitiveness is equally addressed to the EU.
“There might be a certain temptation to use Brexit as a chance to strengthen financial centres across the rest of Europe, for example by offering discounts with respect to licensing procedures. This is not a route we should take.”
Underlining this commitment, Dr Dombret said the Bundesbank would be tough on enforcement for any bank that chose to relocate some or all of its operations to Germany, saying: “We will not accept any empty shells or “letterbox companies” where the business effectively continues to be done out of London.
For critical functions such as management, controlling and compliance, qualified personnel need to be present at the non-UK EU subsidiary at all times.
“And I urge banks not to spend their time inventing strategies to circumvent these requirements. This includes seemingly creative solutions such as ‘fly-and-drive’ banking, where bankers fly in daily from London, or ‘dual hatting,’ where transactions are booked on the EU subsidiary but in fact executed in London.”
The Bundesbank and Germany’s financial regulator BaFin have been contacted by “numerous major market participants” to talk about the possibility of moving jobs to Germany, Dr Dombret said, without naming any companies specifically.
Dr Dombret, who worked in commercial banking before going into central banking, said he thought Britain’s position “as a gateway to Europe is likely to end” and added that he is “sceptical” of an equivalence deal for the UK, saying it would “not [be] a reliable substitute for passporting.”
However, he admitted that the issue of access to the single market is a “two-way street,” with the UK the second biggest market for German banks after the US.
Dr Dombret was speaking at the launch of financial consultancy Zeb’s UK office. You can read the full text of his speech here.