U.K. regulators are weighing new rules to safeguard against financial contagion in the aftermath of this spring's banking turmoil, including some that would lower the threshold for how much business banks can do within British borders before they have to open a subsidiary company.
Subsidiary thresholds have been brought to the fore by the
Since SVB's collapse, British rule-makers have been looking askance at the many foreign banks that have yet to incorporate in Britain. But any change to subsidiary thresholds could raise costs for the many banks, some of which are U.S.-based, that operate from branch outposts in the U.K. to avoid the steep liquidity requirements that subsidization can incur.
"The burden could be significant if [rule changes] cause them to have to reduce their activities in the country," said Gregory Lyons, senior banking partner at the law firm Debevoise and Plimpton. "The bar to have products and activities profitable would be higher. You might have certain businesses stop, or be significantly reduced."
The Bank of England has yet to consider new foreign banking rules formally, and whatever regulation emerges is unlikely to drastically decrease subsidiary thresholds, people familiar with the early-stage review process said.
But the potential business fallout of lowered subsidiary thresholds means that regulators will need to strike a careful balance between scaring off international bankers — particularly as Britain's departure from the European Union has wrinkled its place in global finance — with the protections against foreign financial contagion that tougher subsidy thresholds might provide.
"Policymakers want more tools, for regulation and supervision, and also a little bit more regulatory power," said João Rafael Cunha, assistant professor of economics and finance at the University of St Andrews in Scotland. "But they don't want to run out business."
Questions over whether more foreign banks should operate out of subsidiaries have
SVB's collapse has raised the same questions. Sam Woods, head of the BoE's regulatory wing, floated the possibility of tightening subsidiary requirements in March. Two weeks ago, the Financial Times
Britain's vulnerability to financial contagion — against which countries with bigger economies like the U.S., where the largest share of banking assets are in domestic hands, are more protected — accentuates its interest in stricter foreign banking rules. Almost half of banking assets in the U.K. are held by international banks, according to a 2021
"[SVB] was an imported financial risk," Cunha said. "I think that's the way policymakers are seeing this."
Britain hosts more than 150 banks with some £6.3 trillion ($8.2 trillion) in assets, Woods said in March. Meanwhile, there are 22 U.S. banks among the 336 monetary institutions with permission to accept deposits in the U.K., according to
The BoE's
A complete overhaul of subsidiary requirements is off the table, and rule changes will likely focus more on liquidity and — for banks with retail customers — depositor protections, rather than on subsidiary thresholds alone, people familiar with the BoE's review process have said.
"The U.K. is a very large host to branches of international banks, and that is a necessary condition of running a large financial centre," a BoE spokesman added in a statement to American Banker.
It follows that incoming rule tightening is unlikely to significantly change how many banks do business in London, which remains the global linchpin of foreign currency trading.
"It is perfectly possible that a few banks that have branches will not want to have subsidiaries," Cunha said. "But, I think from the policymaker's perspective, that cost will be small enough to be worth the extra tools and power that they will gain to prevent financial contagion."
The rules would need to be especially taxing before they pushed out the U.S.-based banks doing business in the U.K., which are among American Banks with the most assets.
"The banks that tend to have branches abroad tend to be the largest banks in the U.S.," Lyons said. "You're basically talking about the top 40."
The high capital security of those U.S. banks doubles as a reason to avoid hampering them with extra costs, though, Lyons added.
"U.S. banks are very well capitalized. Lord knows, they're very well regulated, and they're about to have to hold more capital," he said. "I think the concern [among U.S. banks] would be that you're causing disruption of lending and other requirements abroad without any kind of corresponding benefit to do that."
But even while recent
Still, John Court, general counsel at the Bank Policy Institute in Washington, D.C., argued that guardrails preventing financial contagion are already outlined in the Financial Stability Board's
"The main benefit of subsidiarization — namely to mitigate local risks that arise when the foreign parent fails — have largely been addressed in the FSB's post-GFC resolution framework for globally active banks as well as diligent pre-planning by home and host authorities," Court said. "So, the question that remains is: What incremental value does subsidiarization achieve in today's world, and does it outweigh the substantial economic and efficiency benefits of branches?"
Putting up additional red tape around foreign banking could also lead banks to abandon it to the nonbank sector, inciting the same kind of industry
That could incite greater isolation in the global banking sector if other countries took Britain's lead, including those in the EU. Banking trade associations have
The tone struck by trade organizations representing foreign banks in the U.K. indicates that deep concerns might be misplaced.
"The U.K. regulator is clear that branches are an essential part of London as an international financial center, but will undoubtedly be looking at the overall resolution regime in the wake of SVB's rescue," said Giles French, chief executive of the Foreign Association of Banks, which represents some 200 foreign banks with business in the U.K., in a statement to American Banker.
But forcing more banks to open subsidiaries in the U.K. would require them to freeze money in London that could otherwise be moved freely between global businesses.
That would be sure to peeve banks with global operations.
"It's always a trade-off between trying to make a bank nominally safer versus what the cost of that is," Lyons said. "At some point, that balance tips."