The European Central Bank has warned the biggest Wall Street and City of London investment banks that it has lost patience with their use of “empty shell” EU trading desks since Brexit and plans to force them to shift more resources.
The move ramps up the ECB’s long-running push for big investment banks based outside the EU to increase the staff and capital they locate in their financial market operations within the bloc, which started when their European businesses were split because of Brexit.
Andrea Enria, head of supervision at the ECB, said in a blog post on Thursday that “empty shell structures . . . are a very real concern”.
“The ECB is not setting specific targets for the relocation of banking business to the euro area. Instead, we want to ensure that incoming legal entities have onshore governance and risk management arrangements that are commensurate, from a prudential perspective, with the risk they originate,” he added.
The central bank has completed the first phase of an assessment to establish how widely seven international banks transfer the risk of eurozone operations outside the bloc, in particular to the UK, where many had based their European operations before Brexit.
The ECB is focused on eight big banks, one of which it already dealt with in an earlier assessment. They are JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, HSBC, Barclays and UBS.
Out of 256 trading desks at the seven banks, it found that 70 per cent were using back-to-back models, which allow them to offset EU trades with their London entities and effectively manage the risk from the UK. Another 20 per cent used desk-splitting, in which they handle EU clients or assets jointly from desks both in the bloc and in the UK.
Enria said the ECB had identified the 56 most material trading desks and would “issue binding decisions” to their parent groups, requiring them to beef up their eurozone operations or face fines.