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Exclusive-EU eyes lower bar to force foreign banks to become subsidiaries



© Reuters. FILE PHOTO: EU flags flutter in front of the European Commission headquarters in Brussels, Belgium October 2, 2019. REUTERS/Yves Herman/File Photo

By Huw Jones

LONDON (Reuters) -The European Union is considering ways to lower the bar on forcing foreign bank branches to become subsidiaries which must hold more costly capital and liquidity, and EU document showed.

The EU is revising its capital rules for banks, including more intense scrutiny of how foreign lenders operate in the bloc after the departure of Britain following Brexit.

An EU document prepared for member states and seen by Reuters said adjustments could include an “automatic trigger for subsidiarisation”, or ways to constrain the discretion that regulators have in deciding which branches must become a subsidiary.

Currently EU banking regulators decide on a case-by-case basis whether a foreign branch should become a subsidiary they would then directly supervise. A foreign branch’s main regulator is its home watchdog.

“The consideration to call for an automatic trigger to subsidiarise will alarm firms,” a banking industry official said.

Regulators currently review foreign branches with assets of 30 billion euros ($33.41 billion) or more to see if they are systemic enough to pose risks to financial stability.

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

The more drastic decision to force the branch to become a subsidiary has been a last resort, but some member states say the current system is too cumbersome.

“Scope of systemic importance assessment and of the eventual joint decision seem unclear and exhibit apparent inconsistencies,” the document said.

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

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

Financial firms in Britain, now outside the bloc, can still serve EU customers who have approached them without prompting or marketing under a practice known as reverse solicitation.

The document says member states want to review the “appropriate scope” of reverse solicitation.

The ECB is already conducting a “desk mapping” review to see whether new Brexit hubs of banks from London have sufficient senior staff and volume of activities to comply with licence requirements.

British regulators worry that if many bankers are forced to move from London to Brexit hubs, operations in the Britain won’t have enough senior staff.

($1 = 0.8978 euros)

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