Foreign banks based in the European Union may have to hold more capital and liquidity under revisions to rules being considered by member states of the bloc, according to an EU document.

Authorities in Brussels are seeking to classify more foreign banks as subsidiaries rather than branches, a change that would force them to strengthen their local balance sheets and come under direct EU supervision. The move would trap many of the lenders who opened branches in the EU after Britain left the bloc.

An EU document prepared for member states and seen by Reuters said tweaks could include an “automatic subsidiarisation trigger”, or ways to limit the discretion regulators have to decide which branches should become a subsidiary company.

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) in 17 member states holding €510.23 billion ( $569.16 billion) in assets, with variations in how member states treat them.

This is an increase of 14 branches and €120.5 billion in assets over the previous year, highlighting a Brexit-related trend in the use of branches to access to the EU market, said the EBA.

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

Currently, EU banking regulators decide on a case-by-case basis whether a foreign branch should become a subsidiary which they would then supervise directly. The primary regulator of a foreign branch is its national watchdog.

“The idea of ​​calling for an automatic triggering of spin-off will alarm businesses,” said a banking sector official.

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

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

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

“It could put subsidiarization 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 was a last resort, and some Member States consider the current system to be too cumbersome.

“The scope of the systemic importance assessment and possible joint decision appears unclear and has apparent inconsistencies,” the document said.

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

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

UK financial firms, now outside the bloc, can still serve EU customers who have approached them without inducement or marketing in a practice known as reverse solicitation.

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

EU member states and the European Parliament have a say in the final approval of revisions to banking rules.

The ECB is already carrying out a ‘document mapping’ review to see if London banks’ new Brexit hubs have enough senior staff and sufficient business volume to comply with licensing requirements.

UK regulators fear that if many bankers are forced to move from London to Brexit hubs, operations in Britain will not have enough senior staff. —Reuters

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