UK-based investment banks operating in the European Union should have more staff based in the bloc to avoid “empty shells” at trading desks, the European Central Bank (ECB) has said.

The organisation, which carried out a post-Brexit review assessing 264 trading desks across seven institutions, found that the banks don’t yet have “full control of their balance sheets”.

70 per cent of these desks still had a ‘back-to-back’ booking model, while 20 per cent were organised as split desks.

Split desks are where a duplicate version of the primary trading desk located offshore is created in the euro area to manage part of the risk originated there.

In a blog post, Andrea Enria, chair of the supervisory board of the ECB, said that empty shell structures – legal entities located in the euro area that book exposures remotely with their parent company or book them locally but rely fully on risk management hubs and financial infrastructures located in third countries - are “a very real concern”.

She warned that these empty shells are exposed to heightened risk.

“In the event of financial stress or default at the level of the parent entity, the local entity can be left with large unhedged positions and little to no access to the staff and infrastructure needed to wind them down smoothly,” wrote Enria.

The chair also claimed that even during normal times, having risk management resources and infrastructure located offshore can “hinder a bank’s ability to identify, measure and monitor risk” and can “make governance and decision-making less transparent”.

She added that reallocating risk and revenue to third-country affiliates can “worsen the incentive structure for local bank management”.

The ECB is not stopping at the trading desk review in its approach to governance of a post-Brexit financial landscape, it also has plans to investigate credit risk-shifting techniques and the reliance on parent entities for liquidity and funding.

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