Brussels has been accused of trying to “grab business through regulation” as it prepares an overhaul of rules that would make it more difficult for non-EU banks to operate in the bloc.
The European Commission is working on proposals that could mean non-EU banks have to turn some of their lightly regulated European branches into subsidiaries in a move that could cost the industry billions of euros, people familiar with the plans told the Financial Times.
The plans could stoke further tension between the UK and the EU post-Brexit after Bank of England governor Andrew Bailey warned Brussels earlier this year against plotting a protectionist power grab of financial services with tough new laws.
Barney Reynolds, head of financial services at Shearman & Sterling, argued that the latest discussions were “all part of an ongoing attempt to grab business through regulation” and could backfire.
“It’s hard to think such an approach will work, since the money will look for a home that does not seek to control it to the degree the EU would wish,” he added. “Also, subsidiaries are embroiled in underwriting the Eurozone’s massive risks, whereas branches are not. Ultimately, these steps are likely to be self-defeating.”
Mark Bearman, director of prudential regulation at the Association of Financial Markets in Europe, said that “any requirements in relation to the formation of subsidiaries and any proposal to automatically apply those provisions should be undertaken with caution”.
“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,” he added.
European officials believe the change could bring the EU closer to the rules already in place in the US and the UK, sources told the Financial Times, and is expected to only apply to large branches with at least €30bn worth of assets. Subsidiaries are regulated in the same way as individual banks, so would increase costs for the sector but give regulators more oversight.
The European Central Bank (ECB) has been debating how to oversee these branches for a while, with the assets of European branches owned by foreign banks reaching €510bn in 2020. Edouard Fernandez-Bollo, an ECB board member, argued last month that the “absence of harmonisation of these branches means that their supervision and reporting requirements vary considerably”.
The changes, if enforced, could come as a further blow to a sector which was largely left out of the Brexit negotiations and has lost its so-called passporting rights that allowed London-based bankers to deal freely with firms on the continent. Boris Johnson’s former economics adviser Gerard Lyons said in May that ministers must “go into battle” for the City, especially now that the UK is up against “an aggressive EU and intense global competition”.
Banks have moved over £1.3 trillion worth of UK assets into the EU as a result of Brexit and almost €6bn of EU share trading shifted from London to the continent in the first trading day of this year.
The latest discussion on branches is part of a wider overhaul of banking rules known as Basel III regulation, which the commission has said is focused on addressing “remaining flaws” in the current framework without leading to a significant spike in overall capital requirements.
A spokesman for the commission said the “the proposal 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.
“Furthermore, and taking into account the challenges on economic growth created by the COVID-19 pandemic, banks’ capacity to finance the economic recovery should be maintained.”