The deadline for Great Britain to complete its Brexit negotiations is six months from today. Unfortunately, I have seen little evidence that internationally active banks in Britain or elsewhere are prepared for the operational risks to which banks are exposed, especially as uncertainty rises about when Brexit negotiations will be completed and how. Neither banks nor regulators have been transparent with the market about their level of preparedness, something which should concern investors as well as rating agencies. In April 2016, a few months before the majority of British subjects voted in a referendum to leave the European Union, I wrote in a piece for American Banker’s BankThink, that US bank regulators should not wait until Brexit materialized to test the capital resilience of U.S. banks operating in the UK and of the U.S.-based subsidiaries of British banks. To date, no information has been made public about whether U.S. banks are ready for Brexit.
Operational risk, as defined by the international bank standards setter, the Basel Committee on Banking Supervision, (BCBS) is “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.” Operational risk is one of the hardest risks to identify uniformly across an entire bank, and even harder to measure in a period of economic or market volatility, in order to allocate capital to withstand unexpected losses.
To my knowledge no regulator has asked banks affected by Brexit to describe specifically what provisions they have in place for operational risk issues that might arise when Brexit negotiations are complete. For example, here are just a few of my questions that I welcome banks’ risk managers and bank regulators to send me answers. If key personnel quit closer to March 2019 or shortly thereafter, do remaining professionals know how to make sure that transactions get done correctly and in complains with rules and regulations? In the event of market volatility, could there be problems acquiring complete data sets in a manner so that risk managers and bank regulators measure the actual level of a bank’s credit, liquidity, market, and operational risks? Could there be pricing or risk measurement system failures if not all the software licenses needed are domiciled in the UK? Could there be higher exposure to cybersecurity attacks if systems do not function well as Britain exists the European Union? Who at a bank knows exactly how posting and payment of collateral for thousands of transactions will work if significantly volatility arises? How will typical lending and trading processes will work at banks as Great Britain exits the European Union? Are banks prepared to manage all their relationships with outside vendors to whom they outsource projects such as auditors, accountants, financial trainers, and Information Technology professionals?
Much attention has rightly been placed on Brexit’s effect on the UK economy and British banks. Yet, Brexit is not just a problem for British banks. Brexit is changing the global financial services landscape. Given its standing as a financial center, numerous banks around the world, especially those that are internationally active, should be sensitive to the possible effect of potentially chaotic Brexit negotiations.
Autor: Mayra Rodriguez Valladares