Check against delivery.

Good morning Ladies and Gentlemen,

Oscar Wilde said that only dull people are brilliant at breakfast. Should I previously have been of the opinion that I would concur with this rather scathing assessment, today would certainly have forced me to revise my view. And I hope that you will take a similar view after my short speech this morning. In the next twenty minutes or so, I would like to focus on two topics, one of which, at least here in London, might fall on sympathetic ears any time of the day or night: Brexit - and, in relation to it, the upcoming supervisory and regulatory challenges that this historic divorce will create.

There's one thing I would like to say first, however: the decision of the United Kingdom to leave the European Union felt to me like possibly the biggest setback in European integration since the European Coal and Steel Community was first founded in 1951. The United Kingdom's departure doesn't just mean that the European community loses its third-largest member state; it also highlights a possible deviation from the long-travelled path of more and more Europe. Until a few years ago, it looked as though the recently deceased former Chancellor of Germany, Helmut Kohl, was right when he said, "European integration is irreversible. The European train is on the tracks. It is no longer possible to uncouple the engine and connect it at the back so that we travel in the opposite direction". More and more countries joined the European Union, and more and more responsibilities fell within the remit of the European Parliament and the European Commission. The referendum of June 23 has changed this path. As much as I do – together with many other Europeans – regret Brexit, there is little point in looking back on missed opportunities. We should instead look to the future and build a foundation for the time after Brexit. That will certainly be no easy task, or, as you say in the UK: it certainly won't be a piece of cake.

Ladies and Gentlemen,
In particular when it comes to the future reciprocal market access in the relationship between the United Kingdom and the EU27 countries, politicians and financial regulators are faced with challenging tasks. We only have to think of the vast economic interdependency between the UK and the EU. This dependency is even more complex in the financial sector, because economies of scale caused by historical circumstances have made London the hub for capital flows to the EU. There have now been five rounds of discussions, and the Brexit negotiators have not made sufficient progress on the designated key separation issues. For the time being, we therefore have to assume that the UK will not be member of the common market or anything close to it following Brexit. There are only 18 months to go before that happens, possibly leading to a so-called cliff-edge situation. Since, like everybody else, we regulators don’t know what the situation will be in April 2019, we have to think in terms of scenarios and – as is often said these days – hope for the best and prepare for the worst.

Particularly in a period of such uncertainty and transition, regulation will need to find adequate solutions to avoid dangerous distortions at the entry into the post-Brexit world. But any such targeted solution should not become a model for eternity. Things that can be tolerated at the start, for instance to avoid cliff effects, must be brought into an appropriate balance in the medium term. Until this is achieved, our aim is to rise to the challenges of the numerous developments in our supervisory practice. Our objective is to offer supervisory safeguards to protect financial stability. Moreover, we must make certain that all institutions across the eurozone are supervised and regulated in accordance with the same standards. For several months we have been conducting active and open dialogue with the banks and with colleagues at the Prudential Regulation Authority (PRA) as well as the Financial Conduct Authority (FCA) with this aim in mind and, of course, with the European Central Bank (ECB).

The core topic is the question of how we will deal with banks that intend to move their offices to Germany and other countries because they want to ensure that they do not lose the European passporting rights that allow them to conduct business in EU countries. There are many conceivable options: some branches in EU27 countries will certainly be converted into subsidiaries, while other banks will relocate. We will study the business models very carefully in each case and weigh up every legal possibility. We are also taking a very close look at the European Commission's proposal regarding "Intermediate EU Parent Undertakings (IPUs)", into which banks from third countries are supposed to bundle their EU subsidiaries in the future. But this debate is far from over, and the European legislators first need to create the necessary legal basis during the review of the Capital Requirements Directive (CRD). In this respect, we, as supervisors, would welcome an EU-wide harmonisation of the rules and regulations on third-country branches, which at present are regulated only at a national level.

Ladies and Gentlemen,
We do, of course, have clear expectations of the banks that intend to move their offices to Germany. One thing that we will not accept under any circumstances is empty shells or what we call letterbox models. This means that it will not be enough to put up a letterbox in Frankfurt and keep the whole organisation in London. Banks that are planning a comprehensive division of work between offices in London and the EU need to transplant and split up their entire ecosystem established over the years – that means IT infrastructures, knowledge, processes and people. We are aware of the huge effort that this involves for banks in practice, and we are therefore prepared, for example, to accept the continued operation of old IT ecosystems for the time being, at least until it is possible for completely new structures to be built and proven to be sufficiently sound.
We are also aiming to spread the heavy workload on banks associated with the authorisation of internal models for calculating capital needs, which at short notice is almost unachievable – always assuming a cliff edge scenario in April 2019. We have therefore decided, in agreement with the ECB, to enable the continued use of internal models that have been authorised by the PRA for a limited time period provided that certain conditions are met, by relying on the assessments made by UK competent authorities. The institutions must first of all submit their applications to us, including a project plan pertaining to the transfer of the internal models. Over several compulsory supervisory interviews and workshops, we will then clarify, step by step, the models that the institutions have used previously, those that will be used in the future, and the structure of possible transitional processes. The institution will remain in the focus of ongoing model supervision, however, with the goal of establishing, within a predetermined period of time, a model which we have inspected and assessed ourselves.

We have already conducted several workshops with a number of institutions. Of course, we will provide appropriate assistance to all institutions that wish to relocate business to Germany. Some time ago we set up virtual structures for this with dedicated teams to act as permanent points of contact for an institution's authorisation procedure. But we only have limited resources, too, of course. So, as the saying goes, it’s "first come, first served".

Ladies and Gentlemen,

As supervisors, another topic that we must give attention to at the moment is the issue of back-to-back models. This means an EU undertaking concluding a transaction in financial instruments and at the same time entering into inverse trading transactions with their sister or parent company in London in order to transfer the market price risks. We expect institutions that implement such models to have adequately trained risk management staff who are able to assess how many risks and which risks – including market risks – are actually being passed on to the UK, or, looking at it the other way around, how many are to remain in the EU. The banks must be in a position to sensibly manage the associated risks comprehensively – in particular if a back-to-back model should suddenly no longer be possible or would have to be revised.

It is not just back-to-back models that are providing topics for conversation at present, but also the question of the outsourcing of certain functions and business units. Many institutions find it convenient for their back office and control functions, such as risk control, compliance and internal auditing to be carried out largely by a sister or parent company in London. In principle, outsourcing is acceptable from a supervisory perspective, but this is another case where it comes down to finding the right balance. What is not allowed is for the subsidiary in the EU not to have an adequate control system on-site, and to therefore be dependent on the sister or parent company in London in order to fulfil the necessary control functions. The Single Supervisory Mechanism (SSM) has already stated its position on this: in its assessment, the core areas of banking, such as front and back office activities and internal control functions, must be kept in the EU subsidiary and must be equipped with appropriate resources. We share this view. However, there are possible exceptions to this rule for subsidiaries which are considered immaterial from a risk point of view. And that which applies to the core areas of banking and control functions is of equal importance for the management board of the banks. It must be ensured that the managers are able to perform their on-site duties in the European subsidiary in full. We will only accept "fly and drive" in individual cases and for a certain transitional period.

Ladies and Gentlemen,

Another hot topic in relation to this is euro clearing. After all, more than 95% of all interest rate swaps in euros to date have been cleared through London. If something weren't to run smoothly, central banks could ultimately be forced to jump to the rescue to provide liquidity. For this reason, a few months ago the European Commission published its ideas for the stricter supervision of central counterparties domiciled outside the European Union. EU standards for financial regulation and supervision should be enforced for clearing activities in euros outside the EU in one way or another. The European Commission suggested a staged process for this. In principle, I believe this to be a good basis for shaping the future third country regime. Before making a decision, however, we should carry out a comprehensive analysis of the systemic risks and weigh up the possible reactions and consequences.

Ladies and Gentlemen,

The Basel III negotiations are providing a further topic of discussion in the world of finance at present. Now that the reform package has largely been negotiated, the ongoing discussions are dealing with the design and calibration of an output floor, which is intended to limit an undue level of variability in risk-weighted assets and thus in capital requirements when internal models are used. Despite earnest efforts, the Basel Committee has not yet managed to find a compromise that is acceptable to all parties. I can assure you, however, that we are fully committed to this and are working hard to reach an agreement.

Of course, there is much more that could be said about the discussions regarding the finalisation of the Basel III reform package and the various regulatory developments in connection with Brexit. But I suspect that some of you are ready to get to the office, so I will end my brief tour d'horizon here. And now, I look forward to hearing your questions. Thank you very much for your attention!