April 20, 2016 / 2:37 PM / in a year

Exclusive: U.S. regulators query banks on their 'Brexit' contingency plans - sources

A British Union Jack flag and a European flag fly on the Amiens city hall during a Franco-Britain summit in Amiens, northern France, March 3, 2016. REUTERS/Philippe Wojazer

LONDON (Reuters) - U.S. financial regulators are demanding regular updates from Wall Street banks about their contingency plans should Britain vote to leave the European Union, banking and regulatory sources told Reuters.

Scenarios under scrutiny range from how their London operations would handle lengthy uncertainty if Britons opt to quit the bloc in a June 23 referendum, to whether they could still offer financial services in continental Europe from a non-EU Britain.

The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC), which share responsibility for supervising U.S. banks, have told the lenders to present specific plans for their businesses in the event of a “Brexit”, three sources said.

“We’ve been actively asked to do this within the last six weeks. It involves scenario planning, stress testing different outcomes,” said one banking source. “You pick a highly impactful, negative scenario that’s bad but plausible and you work through the implications for the business.”

As well as the U.S. regulators, the Bank of England is also seeking similar information from domestic and foreign banks operating in London, said the sources, who wished to remain anonymous as the process is private.

London’s financial sector, home to many international banks, is among the industries with the most to lose if the world’s fifth-biggest economy leaves the EU, according to many analysts who say an exit could lead to thousands of banking jobs shifting to the euro zone.

The European Central Bank is pushing hard for banks to move euro-denominated transactions from London, which lies outside its jurisdiction, to the euro zone where it can supervise the business more easily.

A vote to leave would be particularly difficult for U.S. investment banks since most run the bulk of their European trading operations out of London offices.

Many use a “passporting” system that enables them to offer services across the EU from their UK-regulated entities. If Britain were to leave it is unclear whether this would still be possible, or if the banks could trade certain types of European securities from London.

The Federal Reserve, FDIC and OCC declined to comment, as did the major U.S. investment banks in London - Bank of America Merrill Lynch, JPMorgan, Citi, Goldman Sachs, and Morgan Stanley.

Support for Britain to remain in the EU stands at 49 percent, 10 points ahead of the “out” campaign, according to an Ipsos MORI poll published in the Evening Standard newspaper on Wednesday. However, the poll also suggested that a reduced turnout would favor the pro-Brexit campaign, closing the gap to six points.

Goldman, Morgan Stanley, Citi and JPMorgan have donated money to the Britain Stronger in Europe group, which is campaigning for the country to stay in the EU, sources have said.

SPOOKING PEOPLE

The contingency reporting exercise is part of the regulators’ normal supervisory work rather than a separate form of stress test, the sources said.

Banks are particularly concerned about a likely lag after any vote to leave before Britain and the EU struck a new deal on trade in financial services, disrupting both their operations and financial markets.

“We will all live with whatever comes out but if you don’t know what’s coming and when it’s coming, then that will really spook people,” the banking source said.

As well as the passporting issue, regulators have asked banks about how they might handle staff and their information technology operations across Europe, the sources said.

Stuart Gulliver, the chief executive of British-based HSBC, said in February the bank could move around 1,000 employees from London to its subsidiary in Paris in the event of a leave vote.

Bank of England Governor Mark Carney has said a vote to leave could hit the British economy and prompt some banks to move away from London. The central bank has also been checking on banks’ preparedness for the referendum and their ability to withstand the market volatility it could cause.

“We are going through all our banks to make sure their contingency plans are the best that one can tell, are appropriate,” Carney told lawmakers on April 19. “We have stress-tested those institutions over the course of the last few years, against not this shock per se, but for elements of a related shock.”

Andrew Bailey, chief executive of the Prudential Regulation Authority, told a parliamentary hearing in February that it was asking banks about their exposure to sterling risk options, in the face of volatility before the vote.

Additional reporting by Lisa Lambert in Washington and Huw Jones; editing by David Stamp

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