Hey, dear Brexiters and other UK friends, I have a funny story about what equivalence means in EU financial services. Everyone is focused on passporting and stuff, but that's not all there is. There are other important equivalences out there. Quick thread.

One of them is related to the quality of banking supervision and for some (weird) reason it impacts how much capital you must set aside when... you deposit cash at your central bank ! If you've got the equivalence it's 0, otherwise it's more likely to be 100% risk-weighted.

This can be important: in the past, after the Portuguese bank BES failed, the Angolan authorities played a dodgy game on a 3bn loan made by BES to the Angolan subsidiary. Although it was not explicitly linked, that led the EU to take away the equivalence of Angola

(Yeah, I can hear you: why was it equivalent in the first place?) So you might think no one gives a shit, but actually another Portuguese bank did: BPI. They had a very large balance at the Angolan CB (impossible to avoid) and the new rules broke their large exposure limit !

the problem was so impossible to solve, that ultimately the best solution was for Caixabank, their largest shareholder, to buy BPI entirely and consolidate it. So that rule can really matter.

Now that new funny story: yesterday Slovenian bank NLB announced that they signed an agreement with the World Bank that would guarantee their risk against expropriation of cash reserves deposited at the central bank of some subsidiaries

What this means is that basically your cash if safe at the CB, except is the country decides to go full Far West and takes away your cash. In that case the World Bank indemnifies you. And you can risk weight your exposure at the CB at 0% instead of 100%! Nice ! That's +54bps CET1

So you'd think, hey cool, that bank has assets in very dodgy countries! Nice the WB agreed to hedge that risk!
Well, actually no. Because if you look at EBA transparency data, NLB only has CB balances in two countries where the numbers match their RWA relief -they ddn't disclose

It could be Macedonia (351m€ rwa) or more likely Serbia (306m€ RWA)! Those are countries which are discussing EU accession, not totally remote jurisdictions in dodgy tax havens!

So the bottom line is this: I can't wait to read that press release when a big GSIB announces that it has entered into a guarantee w/ the World Bank against confiscation of its Bank of England assets (purely for cap optimization purposes ofc). That will look so good