The European Central Bank (ECB) has warned heavyweight investment banks they will need to bolster the “empty shell” trading desks they established in the eurozone after Brexit to reduce their reliance on operations outside the bloc.
The move accelerates 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 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,” he said. “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.”
The assessment is part of the central bank’s supervisory work and desks-mapping review which looks at the booking and risk management practices across trading desks active in market-making activities, treasury and derivative valuation adjustments,
The work aims at ensuring that third-country subsidiaries have adequate governance and risk management capabilities and do not operate as empty shells.
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% 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% 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 by the end of the year, requiring them to strengthen their eurozone operations or face fines.
This could mean, for example, the appointment of a European desk head with responsibility for those business lines, shifting more senior traders to the bloc, tightening governance frameworks, or rolling back from intra-group hedging structures.
A recent study by EY shows that since Brexit in 2020, around 7,000 jobs have moved from the UK to the eurozone with Paris, Frankfurt, Amsterdam and Dublin being the most popular cities.
However, this is far fewer than the tens of thousands predicted. Last month UK City minister John Glen confirms the 7,000 jobs but said London “has not experienced the haemorrhaging” many expected.
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