London-Based Investment Banks to Face Closer EU Scrutiny

Large investment banks such as Goldman Sachs and JPMorgan will be subject to tighter controls in the European Union after Britain leaves the bloc, under EU draft proposals meant to prevent them exploiting laxer rules in EU member states.

Big broker-dealers and investment firms are already required to hold significant capital buffers against the risk of failure, but EU regulators fear that, when they move some of their business from London to the EU, they could seek out jurisdictions with lower capital requirements, Reuters reported.

To prevent this, the European Commission is proposing that supervision of big investment banks operating in the EU should be transferred from national authorities to the European Central Bank, according to draft documents seen by Reuters.

Many of them are planning to relocate part of their business from the EU’s current financial hub, London, to other member states to maintain secure access to the bloc’s market after Brexit.

This is likely to mean an overall transfer of €1.8 trillion ($2.1 trillion) of assets, equal to 17% of all banking assets in Britain, the commission said, citing a report from the Bruegel think tank.

Financial services are a key issue in talks between Britain and the EU on their future relationship after Brexit. The sector accounts for about 12% of Britain’s economic output and potentially has a lot to lose from the end of unfettered access to the remaining EU market of 440 million people.

The overhaul, scheduled for EC approval on Dec. 20, will maintain high capital requirements for big investment firms, but is expected to reduce charges and costs for several smaller companies.

In order to prevent exploitation of the system by larger companies splitting into smaller units, the commission is proposing to treat large investment firms as single entities in the eurozone.

And by transferring the supervision of these firms to the ECB, it also hopes to prevent “supervisory arbitrage”, where national regulators compete to attract investment banks from London by offering them waivers or lower capital requirements.

The commission has held back the adoption of the measures by a few weeks because of concerns raised by the financial industry and some EU countries that are reluctant to lose their supervisory powers over large financial firms, banking and EU officials told Reuters.