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Foreign banks face bigger capital bill under draft EU plan

Officials in Brussels are looking to classify more
foreign banks as subsidiaries rather than branches, a change which would
require them to beef up their local balance sheets and come under direct EU
supervision. The move would ensnare a large portion of lenders which opened
branches in the EU after Britain left the bloc.

An EU document prepared for member states and seen by
Reuters said adjustments could include an “automatic trigger for
subsidiarisation”, or ways to constrain the discretion that regulators
have in deciding which branches must become a subsidiary.

The bloc’s European Banking Authority (EBA) said in a
June 2021 report that at the end of 2020 there were 106 third country branches
(TCBs) across 17 member states holding 510.23 billion euros ($569.16 billion)
in assets, with variations in how member states treat them.

This was up 14 branches and 120.5 billion euros in
assets on the prior year, highlighting an increasing trend, linked to Brexit,
in the use of branches to access the EU market, EBA said.

China has 18 branches, followed by Britain with 15,
Iran 10, and the United States nine.

Currently EU banking regulators decide on a
case-by-case basis whether a foreign branch should become a subsidiary they
would then directly supervise. A foreign branch’s main regulator is its home
watchdog.

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“The consideration to call for an automatic
trigger to subsidiarise will alarm firms,” a banking industry official
said.

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Regulators currently review foreign branches with
assets of 30 billion euros ($33.4 billion) or more to see if they are systemic
enough to pose risks to financial stability.

They can require the branch to restructure or hold
extra capital if it wants to continue operating in the bloc.

Jeremy Kress, assistant law professor at the
University of Michigan’s Ross School of Business in the United States, said
stricter EU rules could also prompt the United States to review its rules for
foreign bank branches, which he said continue to be a major regulatory
loophole.

“This could put subsidiarisation on the agenda in
the United States,” said Kress, who is a former Federal Reserve official.

APPROPRIATE SCOPE

The decision to force branches to become subsidiaries
has been a last resort, and some member states say the current system is too
cumbersome.

“Scope of systemic importance assessment and of
the eventual joint decision seem unclear and exhibit apparent
inconsistencies,” the document said.

Some states also want to lower the assets threshold
that triggers a review of whether a branch should become a subsidiary, the
document showed.

A combination of lower thresholds and an automatic
trigger would give the European Central Bank, which supervises top lenders,
more sway and make it harder for branches to avoid becoming subsidiaries.

Financial firms in Britain, now outside the bloc, can
still serve EU customers who have approached them without prompting or
marketing under a practice known as reverse solicitation.

The document says member states want to review the
“appropriate scope” of reverse solicitation and make clearer when an
activity should be conducted at least in a branch in the EU.

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EU member states and the European Parliament have
joint say on final approval on the revisions to banking rules.

The ECB is already conducting a “desk
mapping” review to see whether new Brexit hubs of banks from London have
sufficient senior staff and volume of activities to comply with licence
requirements.

British regulators worry that if many bankers are
forced to move from London to Brexit hubs, operations in Britain won’t have
enough senior staff.

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