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December 15, 2011
U.K. Is Pondering End of the Euro
LONDON—British regulators are meeting with banks to discuss the state of their preparedness for a potential breakup of the euro zone, according to people familiar with the matter.
The U.K.'s Financial Services Authority has been talking with chief risk officers at top British and international banks to get a better understanding of their contingency planning, the people said.
The regulator has asked banks to submit reports detailing their preparations for what would happen if the monetary union unraveled or individual member countries were to revert back to their old national currencies.
The FSA is planning to host a meeting in coming weeks at which top bank executives will huddle with senior regulators to compare notes on how they can further prepare, these people said. The meeting will include executives from big British banks as well as international companies with London investment-banking arms.
"It's an opportunity for firms to share their experiences," one person said. The meeting will include a discussion about areas in which the banks need to improve their preparations, this person said.
The FSA also is engaging in one-on-one dialogues with some banks to discuss ways they can do more to prepare for a possible euro-zone breakup.
Continues ...read more ..
A top FSA official, Andrew Bailey, said late last month that the FSA is encouraging banks to engage in contingency planning. "Good risk management means planning for unlikely but severe scenarios, and this means that we must not ignore the prospect of the disorderly departure of some countries from the euro zone," Mr. Bailey said at a London conference. "I offer no view on whether it will happen, but it must be within the realm of contingency planning."
The FSA has recently stepped up its efforts to gauge the fallout. Late last month, the agency sent an initial letter to banks asking for their update on contingency planning such as how the banks would handle legal agreements based on the euro currency and how they would internally process a breakup, according to a people familiar with the letters.
The FSA found that banks had mostly been considering scenarios in which just one or two countries—namely, Greece or Portugal—left the euro zone. Regulators earlier this week sent another letter pressing banks to consider plans for a breakup of the entire 17-nation currency bloc, these people said.
Members of the FSA this week have also been meeting with U.K. banks' chief risk officers. U.S. banks have been having similar discussions with their regulators, these people said.
At least one major U.K. bank, however, has refused to provide additional information on the scenarios it is planning for, saying to do so would be too onerous to pull together, according to a person familiar with that bank's thinking.
The banks have been telling regulators they focused on several areas of risk in the case the euro dissolves. One is how former currencies like the drachma or the lira would be valued.
In their discussions with the FSA on the matter, they have expressed their desire for an orderly euro-zone breakup, should one occur, with international bodies such as the International Monetary Fund and Organization for Economic Cooperation and Development clarifying the value of countries' currencies and the legal framework around euro-denominated deals and deposits.
They have also told regulators that their technology and support functions would need to be reviewed in order to understand whether existing systems could be adapted to trade in new currencies, and whether traders would have to be retrained, this person said.
In all, some executives have privately concluded that a full, disorderly breakup of the euro zone would be "pretty catastrophic" for them, this person said.
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