Supervisors at the Bank of England expressed "significant concern" to Deutsche Bank in a letter concerning its UK branch authorisation ahead of Brexit, according to a leaked internal document from the German lender.
Key areas of concern for the Prudential Regulation Authority, the supervisory arm of the central bank, include Deutsche Bank's recovery and resolution planning in a crisis and its overall business model, according to a confidential summary of regulatory interaction seen by Business Insider.
So what does this all mean?
Well, for a start Deutsche Bank's UK branch, based in London, is one of the lender's key hubs for markets and investment banking activities. Brexit will likely see a change in the system of agreements that allow these types of European bank branches to operate freely in the UK, meaning the Bank of England will have to authorise each one separately.
Branches are a cheap and easy way for banks to move capital and funding around their group structure, but the benefit for the banks also makes regulators nervous. In the event of a financial crisis, capital and liquidity could be swept back to the bank's headquarters, potentially leaving UK counterparties out of pocket.
This appears to be the nub of the PRA's concerns, highlighted by the words "recovery and resolution."
"The PRA acknowledges the improvements made to UK oversight and governance and appreciates the regular engagement with DB management," according to the document, which summarises a July 31 letter from the PRA.
"However significant concern remains. PRA has shifted its supervisory priority to focus on preparation for UK branch authorisation and will focus on the areas of most concern – controls, business model and recovery and resolution, alongside known areas of material weakness, including liquidity risk management." [...]
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