By Huw Jones and Marc Jones
LONDON (Reuters) - Banks based in Britain seeking to do business in the European Union after Brexit should apply early for a licence to set up actual operations and not "empty shells", European Central Bank supervisor Sabine Lautenschlaeger said on Thursday.
In the strongest comments yet on the subject from an ECB official, Lautenschlaeger warned lenders in Britain not to circumvent rules.
She declined to say how many staff a new banking operation should have, saying it would be looked at on a "case-by-case" basis.
She expected many of the 40 banks in Britain that currently serve continental customers to ask the ECB for a licence, and urged them to get in touch sooner rather than later.
"I do not see the ECB issuing banking licences to empty shell companies," Lautenschlaeger, who sits on the ECB's executive board, said in London.
"Our objective is to make the banking system safe and sound. I therefore expect banks which are seeking a licence in the euro area to meet our standards. There will be no race to the bottom in banking supervision," she said.
Weighing in on the contentious issue of keeping euro derivatives clearing in Britain, Lautenschlaeger said ECB consent would depend on whether the new, post-Brexit legal framework offered an unchanged level of involvement for the ECB, and ensured financial stability in the euro zone.
London dominates the clearing of derivatives denominated in euros, and the ECB is a member of the colleges of supervisors from different jurisdictions which oversees them.
Lautenschlaeger said that apart from remaining in supervisory colleges of euro clearers in London, other, unspecified conditions would have to be met which will depend on what sort of trading deal Britain and the EU agree after Brexit.
An attempt by the ECB to shift euro clearing to the euro zone was blocked by the EU court, but British Prime Minister Theresa May has said the UK will no longer come under the court after Brexit.
Banks in Britain that plan to permanently opt for "back-to-back" - trades transacted on the continent being booked in London to cut costs - will be disappointed, she said.
"This is not about a full ban of back-to-back booking. We rather aim at ensuring both an adequate local management of all material risks and the resolvability of the euro area entity," she said.
"Needless to say that I would certainly not accept banks booking all exposures with the euro area entity while having their risk management and internal control systems outside the euro area," she added.
Some banks are thinking of complementing or even replacing their licensed subsidiaries with investment firms or branches, which are supervised by national watchdogs or not supervised as banks, she said.
But regulators in Britain supervise such large firms as banks, and EU rules could be changed to allow its regulators to do likewise, she said.
"The current review of the European banking rules might provide an opportunity to do so," Lautenschlaeger said.
(Additional reporting by Balazs Koranyi in Frankfurt; Editing by Robin Pomeroy and Ken Ferris)