The impact of Brexit on Banks booking model strategies

By Richard Goodger 

Pre-financial crisis global banks typically centred their operations on either remote or large scale back to back booking models. The ensuing regulatory and structural reform agenda forced banks to change the way they operated, driven not by a desire to optimise market risk and reduce costs but satisfy supervisors demands. Regulators are no longer interested in just the ‘what’ and ‘how’ but also ‘why’ banks operate in the ways they do – this has been a challenge for banks to explain due to complicated legal entity structures, which have evolved inorganically over time and poor process documentation.

Most institutions have large scale and complex structural reform programs in place, moving away from models where risk is concentrated in few central areas to a more simplified regional based setup. Given London’s status as Europe’s financial hub and access point for most foreign banking organisations to the continental market, Brexit is clearly going to have far reaching implications on ongoing programmes as well as future plans. The key question is how can banks continue to service their EU clients with as minimal disruption as possible?

Subsidiarisation is an expensive process which requires significant amounts of capital to be maintained, and with talk of the EU adopting a similar approach to the US, in requiring foreign banking organisations to create an Intermediate Holding Company (IHC) the burden is only likely to increase. In the event the capital question can be solved, there are then the significant other costs of infrastructure and human capital which need to be managed – not easy with today’s costs reduction targets across the board.

Potential other workarounds which have been discussed, such as a reversion to the back to back booking model is not without challenges. Even if national regulators accept this as a viable option what will the impact of the recent Basel Committee on Banking Supervision (BCBS) /IOSCO Margin Reform legislation be? If banks are unable to gain intra-group exemptions the costs of moving risk, through margin requirements, could potentially be huge. Reverse solicitation, in certain instances, is another model which could be considered for some business but this carries risks. With complicated sales and coverage models, where individuals often wear multiple hats, up against a myriad of legislation and varying rules by country, how long would it be before issues started arising?

One thing is certain, with growing the top line continuing to be a challenge and continued pressure on reducing costs, banks can’t afford to get their post Brexit booking model strategy wrong.

If you are interested in a discussion around the topics raised in this piece please contact Richard Goodger