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Brussels eyes new rules to tighten grip on branches of non-EU banks

Brussels is preparing a sweeping overhaul of the regime that allows foreign banks to use lightly regulated branches to operate across the EU, in a move that could push up costs for the industry.

The European Commission is working on proposals to empower financial regulators to force banks to turn some of their European branches into subsidiaries, if the branches’ activities are deemed sufficiently large and risky, according to people familiar with the plans.

The rules aim to crack down on thinly supervised non-EU banks that are expanding rapidly in Europe — a trend accelerated by Brexit as financial institutions from Asia, the US and other markets broaden their activities in the single market.

The European Central Bank, which has been supervising Europe’s biggest banks since 2014, has grown increasingly concerned that the branches system allows some foreign banks to continue escaping ECB oversight by doing much of their business in the bloc via lightly supervised branches.

However, the proposals could cost the industry billions of euros since capital and liquidity requirements for branches are largely far lower than those imposed on subsidiaries, which typically have to meet the same rules as standalone banks.

European officials believe the changes would bring EU rules on foreign banks closer to those already in place in the US and the UK. However, bankers and their lobbyists warn the proposed rules could prompt them to back away from some activities and could also trigger retaliation in other countries which allow large European banks to use branches to carry out their operations.

In a speech last month, Edouard Fernandez-Bollo, a board member at the ECB’s supervisory arm, said it was “particularly important” to take this opportunity “to increase harmonisation in this area”. European branches of non-EU banks had assets of €510bn at the end of 2020, up €120bn on a year earlier.

Details of new proposals, being overseen by financial services commissioner Mairead McGuinness, are still being debated within the commission. They are part of the EU’s next package of banking legislation which mostly centres on giving legal basis to the Basel III global banking capital standards. The Commission is due to publish the draft legislation on October 27 after which it will be finalised by the European Parliament and Council.

The rules are expected to apply to EU branches with at least €30bn of assets, although the threshold is still being debated in the commission and could change. Financial supervisors would have to regularly review the situation of the non-EU banks’ branches and decide whether turning them into subsidiaries would make sense.

Details of new proposals, being overseen by financial services commissioner Mairead McGuinness, are still being debated within the commission © Alexandros Michailidis/SOOC/Bloomberg

The proposals also provide for increased co-operation between banking supervisors for smaller less complex branches, closer oversight, and minimum harmonisation of the capital and liquidity requirements for branches directly owned by non-EU banks.

An executive at one large US bank said he was “concerned about being caught by a proposal that was to address bad apples, and becoming collateral damage”. An executive at another said that even if it was unlikely that his bank’s branches would be turned into subsidiaries, it could still change the way the bank operated because it would have to be prepared for the possibility.

The lobby group Association of Financial Markets in Europe said “It would not be appropriate to require subsidiarisation without a full understanding of the reasons for doing so and whether it was likely to result in adverse effects for customers and financial stability more widely”.

The commission said the proposals “will meet our international commitments to implement the Basel III standards, but adjustments to those will be made to reflect the specificities of the EU economy and banking sector.”

Commissioner McGuinness said last month that the overall package will address remaining flaws in the framework for bank regulation without leading to a “significant increase” in overall capital requirements.

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