(Bloomberg) -- Germany's financial regulator offered to allow most banks that move operations there because of Brexit to keep current models for setting capital requirements for as long as two years, people with knowledge of the matter said.
BaFin told banks at a meeting Monday that it would still vet each case individually and expect lenders to shift all business to risk models approved by the regulator after the transition period, according to two people, who asked not to be identified because the matter is private. All new loans would have to be risk-weighted under BaFin-approved models straight away, they said.
Allowing banks to keep their internal risk models for loans would prevent relocating firms from having to apply different capital requirements on their existing business. Each risk model used in Germany would need to be affirmed, but previous approval by a trusted regulator would facilitate the process, another person said.
Bonn-based BaFin met with about 50 representatives of foreign banks at a closed meeting in Frankfurt to answer their questions about Germany's regulatory framework. Banks said to be considering Frankfurt as their new Europe hub after Brexit include Citigroup Inc., Goldman Sachs Group Inc., Lloyds Banking Group Plc, Standard Chartered Plc and UBS Group AG, though none have officially confirmed if and how much business they would relocate to Germany's financial capital.
Read more: Where banks are considering moving people
BaFin also pledged not to be overly strict on how many employees banks would have to transfer to Germany in order for that business to be considered as based inside the country and thereby gain the right to operate across the EU, the two people said. Bafin would only require managers to physically move to gain such passporting rights, though the regulator would decide on a case-by-case basis, the people said.
There is precedent for the concept of transitioning risk models. When the ECB assumed its oversight role in 2014 it didn't initially authorize models, relying instead on the previous judgments of national supervisors. It only began a review -- still ongoing -- of the thousands of risk models nearly two years ago.
Experts have said that the failure to offer transition periods could have severe ramifications, with consulting firm PricewaterhouseCoopers warning in a report published Tuesday that such an outcome of the Brexit negotiations would be “a significant threat” to market stability.
“We do not see Brexit as a reason to celebrate,” BaFin's Deputy Chief Executive Director of Banking Supervision Peter Lutz said in a statement after the meeting. “But now we need to take a pragmatic approach and offer institutions the necessary supervisory clarity for their strategic decisions.”
Many banks that have been servicing EU clients through their London operations are now finalizing their Brexit plans. Frankfurt is a natural pick for many firms given a financial ecosystem featuring Deutsche Bank AG, the European Central Bank and BaFin, one of the only regulators in continental Europe with experience overseeing complicated derivatives trading.
“The event came at the right time,” said Oliver Wagner, managing director of the Association of Foreign Banks in Germany, about the Monday meeting. “There is still a lot of uncertainty in the current discussions.”
--With assistance from Gavin Finch To contact the reporter on this story: Steven Arons in Frankfurt at sarons@bloomberg.net. To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net, Jon Menon, Chad Thomas
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