One of the chief supervisors of eurozone banks has said that institutions in the European Union should be preparing for a hard Brexit as part of their contingency planning.

The warning from Danièle Nouy, chair of the Supervisory Board of the European Central Bank, comes as talks between UK and EU negotiators officially get underway in Brussels, with David Davis leading discussions for the UK and Michel Barnier representing the EU.

Nouy, who was addressing the European Parliament’s Economic and Monetary Affairs Committee in Brussels today, said: “We are making sure that euro area banks, in particular those with subsidiaries or branches in the United Kingdom but also those with other business ties to the country, have adequate contingency plans in place and are preparing for the possibility of a ‘hard Brexit’.”

A so-called hard Brexit would most likely mean the UK leaving the single market and customs union, an option most City of London institutions want to avoid. UK Prime Minster Theresa May was pushing for a hard Brexit but some are hopeful that the result of the snap general election, in which her Conservative Party lost its majority, has paved the way for a softer stance.

Nouy also warned about the possibility of UK-based institutions exploiting regulatory loopholes as they move activities into the EU “by carrying out bank-like activities through an investment firm or third-country branches, both of which are not supervised at euro area level, but rather at national level”.

She added: “While banks take various factors into account when deciding where to locate and how to structure their operations, the fact that the fragmented regulatory and supervisory framework in the EU may play a role in their decision-making is highly undesirable.”

These issues are being addressed through the review of the Capital Requirements Directive and accompanying regulation, she said.

It follows similar warnings issued by Europe’s top markets watchdog last month. In May, the European Securities and Markets Authority announced plans to establish a new supervisory body to prevent a ‘race to the bottom’ by national regulators in EU member states as they court City firms relocating to the bloc post-Brexit.

Also in May, William Coen, the secretary general of the Basel Committee on Banking Supervision, told those attending the City Week conference in London: “As part of our ongoing monitoring of the Basel framework, we will pay particular attention to regulatory arbitrage and determine the appropriate response, be it regulatory or supervisory.”

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