European bank regulators will need "unusual answers" to Brexit -German watchdog

LONDON, Feb 1 (Reuters) - Regulators across Europe will need to be flexible and find "unusual answers" for handling banks looking to move operations from London to the continent after Britain leaves the European Union, a top German regulator said on Wednesday.

Banks in Britain are already beginning to implement plans to ensure they can continue serving their continental European clients after Brexit, expected in just over two years' time.

With (Other OTC: WWTH - news) no clear blueprint for Britain's new trading relationship with an EU of 27 member states, regulators worry that disruption to cross-border customer links could undermine financial stability.

Felix Hufeld, the head of German financial watchdog Bafin, signalled on Wednesday in a speech in London that he and his counterparts across Europe may need to be flexible over Brexit.

Hufeld said it would be a while before it is possible to see the likely outcome of two years of Brexit negotiations.

"Plenty of water is still likely to flow under London's bridges before we know precisely how soft or hard the Brexit will ultimately turn out to be," he said. "In such an environment, regulation will also need to find unusual answers."

British Prime Minister Theresa May, who plans to launch divorce proceedings by the end of March, has said Britain intends to quit the EU's single market, which would isolate the City of London (LSE: CIN.L - news) from many European clients.

Regulators would have to show "pragmatism and flexibility on many individual issues," Hufeld said in a prepared text of his speech.

He compared regulators' role to playing good jazz music that involves improvising, while at the same time keeping control.

"With improvisation, it is like with good jazz; it really only works if you can play the instrument and the notes perfectly," he said.

Bank of England Governor Mark Carney warned last month that the rest of Europe has more to lose than Britain from an abrupt Brexit because of the importance of Britain's financial services industry for the region.

Regulators in European countries competing for post-Brexit banking business are offering London-based banks a range of short-term workarounds to help them relocate, bankers, regulators and lawyers say.

Many banks are looking to Frankfurt as a new EU base - a process that could normally take several years to complete, going well beyond the expected 2019 Brexit deadline.

Germany's top regulators met about 50 envoys from foreign banks on Monday to explain how they could move business to Frankfurt. (Reporting by Andrew MacAskill and Helen Reid; Editing by Adrian Croft)