- Bank of England / YouTube
- Bank of England announces plans that will allow EU banks to keep operating in the UK more easily after Brexit.
- Plans centre around allowing EU lenders to operate branches, rather than subsidiaries in Britain.
- New proposals announced as the BoE publishes its findings on its “Approach to the authorisation and supervision of international banks, insurers and central counterparties.”
LONDON – The Bank of England has proposed a set of new plans that will allow European lenders offering wholesale finance to keep operating almost as normal in the UK once Britain leaves the EU.
In a paper published on Wednesday afternoon, the bank said the “UK’s financial system is both a national asset and global public good.”
“Keeping the UK’s financial system open to foreign institutions is in the best interests of the UK, EU and global economies.”
As such, it proposed a series of new regulatory measures designed to deal with the UK financial sector’s uncertain future outside the EU.
“In expectation of the future legal framework following the negotiations between the UK and the EU, firms currently branching into the UK under ‘passporting’ will need to be authorised to operate in the UK.”
“The PRA (Prudential Regulation Authority) therefore expects to undertake the authorisation of relevant firms on the basis of this proposed updated approach.”
Here’s the Bank of England’s explanation of what the new policy will entail (emphasis ours):
In terms of what firms do, the PRA must take into account how “systemic” their activities are in the UK. Specifically, the types and amounts of business undertaken will determine the intensity of the PRA’s approach to supervision. If the branch is important for the resilience and stability of the UK financial system as a whole, the PRA will place greater emphasis on the degree of influence and visibility that it has over the firm.
For example, in making its assessment of whether a branch is systemic, the PRA will take into account a number of factors, including size (whether the firm’s UK footprint is larger than £15 billion in total assets), and inter-connectedness with the UK financial system.
The, admittedly complicated, chart below illustrates the PRA’s proposed new approach:
- Bank of England
Due to current EU regulations, most major European lenders operating in the UK do so through branches, which offer an easy, cheap way of moving money and services around the continent.
Branches hold the added bonus that for lenders banks can quickly pull cash back to their main business – say for instance, Deutsche Bank moving money back to Germany – in the event of a major crisis. That can be bad news for customers, who can lose access to financing.
Subsidiaries on the other hand are a far more complex form of business structure that essentially forces banks to create a new version of themselves that becomes a UK company. They must conform with tougher rules on capital buffers, tying up more cash.
“Encouraging EU banks to continue to operate in the UK will help preserve financial stability for the UK and the EU and will help defend London’s position as an open global financial centre,” Miles Celic, head of the lobbying group TheCityUK said in a statement.
The future of the City of London and the wider UK financial sector has been up in the air since the Brexit vote, with fears about the loss of the so-called financial passport causing many overseas lenders to announce plans to set up new EU operations away from the UK.
“In the absence of continued passporting rights post-Brexit, firms currently exercising those rights to establish a branch or provide services into the UK (‘inbound firms’) will need to seek PRA authorisation to carry on PRA-regulated activities in the UK,” Sam Woods, the PRA’s CEO said in a letter send to major financial services CEOs.
Those fears were compounded somewhat this week when the EU’s chief Brexit negotiator, Michel Barnier ruled out a free trade deal with Britain which includes financial services unless Britain remains in the single market.
“There is no place [for financial services]. There is not a single trade agreement that is open to financial services. It doesn’t exist,” Barnier said.