UK regulation of international bank branches to focus on resolution plans, PRA confirms

Out-Law News | 12 Sep 2014 | 2:57 pm | 1 min. read

Banks headquartered outside of the European Economic Area (EEA) will be expected to adequately cover the risk of future failure of any UK branch before they will be able to open or operate one, the Prudential Regulation Authority (PRA) has said.

The new rule, which is now in force, is part of the UK's finalised approach to the supervision of UK branches of non-EEA banks. The new policy also sets out the PRA's approach to UK branches of EEA-based banks, as well as its treatment of UK subsidiaries of international banks.

Internationally-headquartered banks can operate in the UK as either subsidiaries or branches, each of which is subject to a separate legal regime. A UK subsidiary of a foreign bank is a legally distinct entity which is subject to the same supervisory model as any PRA-regulated UK bank. A branch is not a separate legal entity, which means that it is ultimately subject to the capital requirements and supervisory regime of the parent bank's home country.

All banks operating in the UK must also comply with the Financial Conduct Authority's conduct of business rules. This applies equally to branches and subsidiaries of international banks.

The final policy statement will apply to both new and existing branches. It limits branches that wish to take deposits from retail customers to £100 million in account balances and a maximum of 5,000 customers. Wholesale banks which serve large companies and other financial institutions will not face these size limits.

The PRA's decision on a bank's suitability to open a UK branch will be based on three factors, according to the statement. These are whether the supervisory regime in the bank's home country is equivalent to that of the PRA; the nature of the branch's UK activities whether retail or wholesale; and the nature of the bank's resolution plan. Before an international bank will be able to open a UK branch, the national supervisor will have to provide an assurance to the PRA that the nature of the bank's resolution plan "reduces the impact on financial stability in the UK" in the event of that bank's failure, according to the statement.

Once the PRA is satisfied of these factors, it will then require "a clear and agreed split of prudential supervisory responsibilities with the home state supervisor", the PRA said. If the bank and its supervisor cannot provide these assurances, the PRA may refuse to authorise a new branch or cancel the authorisation of an existing branch, it said.

This week, the Bank of England granted a licence allowing a Chinese bank to open a wholesale branch in the UK for the first time. Industrial and Commercial Bank of China will not be permitted to take retail deposits under the terms of the licence, according to Reuters.