According to a study, there could be competition between the UK and the euro zone because of different banking supervision practices after Brexit.
The British supervisory authority PRA is following a much less strict approach than the European Central Bank (ECB) when it comes to capital requirements for financial institutions, said the Leibniz Institute for Financial Market Research SAFE in an analysis published on Thursday on behalf of the EU Parliament.
For example, the UK regulators applied a lower risk weight to credit claims.
"By leaving the European Union, Great Britain regains more regulatory leeway and can make faster decisions in times of crisis on the basis of a leaner supervisory structure," said Tobias Tröger, Director at the SAFE Institute and co-author of the study, explaining the results. The banking supervision based at the ECB, on the other hand, is complex and cumbersome. "Our observations do not mean, however, that the euro zone, as a location for banks, has to admit defeat in a regulatory race 'downwards' against Great Britain," explained Tröger.
The researchers see positively that the euro zone is setting up a safety net for the financial institutions as part of the banking union, which will pay off in future banking crises. This will make it easier to cope with them. Among other things, the institutes could expect lower costs of capital. That might compensate for the complicated structure of the supervision. The researchers based their analysis on research results in banking regulation as well as on the stress test scenarios of the European banking authority EBA and the Bank of England.