U.K. Regulator Spells Out New Rules for Foreign Bank Branches

WSJ: Plan Relates to London's Attempts to Become Hub for Trading the Chinese Renminbi.

The U.K. unveiled new proposals that would make it more difficult for some foreign banks to operate in the U.K. and easier for others, subject to specific agreements with their home supervisors.

The new rules were published Wednesday in a consultation paper by the Prudential Regulatory Authority, which is responsible for supervising individual banks. They are the latest in a series of supervisory actions across the world that aim to reassert national control over retail banking in particular, attempting to protect local taxpayers against any future failures.

However, they also leave the door open to a more relaxed and trust-based relationship with supervisors in such countries as the U.S. and China in the realm of international wholesale banking, which both the U.K. government and the Bank of England see as a crucial part of the U.K. economy.

"The ability for financial services firms to branch into other countries is, if done safely, an important component of an open world economy, which in turn benefits the U.K. economy," the PRA said.

Although the regulatory authority didn't single out any country by name, the consultation paper sketches out the conditions that would govern London's attempts to become a hub for trading the Chinese renminbi. A key element of the government's strategy is to encourage Chinese banks to set up branches there.

All other things being equal, banks prefer to operate as branches because subsidiaries are more expensive to run. Subsidiaries need their own dedicated pools of capital and liquidity, as well as their own boards and legal entity, and have the routine extra cost of reporting to "host country" supervisors.

Specifically, the PRA said it wouldn't insist on branches of non-European banks holding minimum levels of liquidity in the U.K., if it were satisfied that the quality of supervision in the bank's home country is "equivalent," and if it had clear assurances that a failure wouldn't threaten U.K. financial stability, by crashing "critical economic functions." Those include retail and commercial banking as well as interbank activities and payments and custody services. The PRA will require assurances from home supervisors on each of them in order to allow a bank to operate as a branch.

The paper took a tougher line on non-European bank branches that take retail deposits, saying it would want anything bigger than token retail operations to operate as a subsidiary in the future. According to the paper, some two dozen foreign branch operations have over 10 million pounds in deposits covered by the national deposit guarantee scheme, with four having over 500 million pounds each.

"The new supervisory approach is expected to require some branches to either exit the market or become a subsidiary," the PRA said.

The paper didn't cover the issue of subsidiaries of banks based outside the European Economic Area, meaning that there was no direct response to the U.S. Federal Reserve's announcement last week on the operations of foreign banks in that country. The PRA said it would discuss that issue later this year. The consultation process runs through May 27.

Write to Geoffrey T. Smith