The main rationale for the proposals is to protect UK financial stability. As the PRA notes in its consultation paper, in September 2013 there were 145 branches of international banks operating in the UK, which in aggregate account for 31 percent (£2.4 trillion, equivalent to around 160 percent of UK GDP) of the total assets of the UK banking system.
The essence of the PRA’s proposals is to prevent a non-EEA branch from undertaking any critical economic functions in the UK unless (a) its home state supervisor’s resolution regime meets international standards and (b) the resolution plan for the individual bank is credible, including whether the plan adequately covers the operations within the UK branch.
In addition, new non-EEA branches would be expected to focus on wholesale banking, and to confine this to a level that is not critical to the UK economy.
The PRA also intends to make full use of the limited scope available under EU legislation to ensure that EEA branches undertaking critical economic functions in the UK are subject to appropriate prudential supervision and could be resolved effectively.
The PRA’s proposals will make it more difficult for foreign banks – especially from outside the EEA – to operate branches in the UK. The clear intention is to increase the pressure on branches undertaking critical economic functions in the UK to become subsidiaries, and to limit the activities of new entrant branches to modest levels of wholesale banking activities.
To some extent banks will not be in control of their own destiny – the assurances required by the PRA for a bank to continue to operate a UK branch focus primarily on the resolution regime implemented by the bank’s home state authorities, and on the credibility of the resolution plan for the bank drawn up by those authorities.
These proposals are a further example of the growing trend towards countries imposing local requirements to protect national financial stability, in this case through a mixture of the ring-fencing and resolvability of retail deposit-taking and other critical economic functions. The recently finalised US rules on foreign banking organisations are another example, based in that case on national rules for capital, leverage, liquidity and risk management. Some other countries have already made similar moves, and others may be increasingly inclined to follow this path.
This highlights the tension between protecting national interests and the Financial Stability Board’s recent statement on avoiding domestic measures that fragment the global financial system.
- Restricting the business model of existing non-EEA branches – some non-EEA branches will be under pressure either to reduce the scale of their critical economic functions in the UK, or to switch to becoming a subsidiary and having to meet the full set of UK prudential requirements. Some non-EEA branches may scale back their business in the UK in response.
- Restricting the business model of new non-EEA branches – the PRA states a clear intention that new branches from outside the EEA will be expected to focus on wholesale banking, and to limit this to non-systemic levels.
- EEA branches – an EEA bank exercising its passporting rights to operate a branch in the UK could find itself stuck in the middle of a dispute between the PRA and the bank’s home state authorities, if the PRA has concerns over the supervision and resolution approaches of the home state authorities. It will also be of interest to see how this plays out in the context of the EU Commission’s proposed Regulation on structural separation for major European banks.
- Reporting – both EEA and non-EEA branches will be required to report to the PRA on the size of their activities relating to potential critical economic functions. They also need to monitor this closely themselves, and to remain alert to when their business activities are likely to attract the close attention of the PRA.
To discuss the implications further please contact Giles Williams or Clive Briault.