Foreign banks face new EU set-up to allow more scrutiny

REUTERS: Nineteen foreign banks in the European Union will need to set up new holding companies so that regulators can scrutinise them more closely, an EU discussion paper says, mirroring steps taken by the United States.

The European Commission proposed last November that banks headquartered outside the bloc consolidate their EU activities under an “intermediate parent undertaking” or IPU in response to U.S. moves to require foreign banks to set up such companies.

The commission, which is the EU’S executive, has now fleshed out its thinking and has made a preliminary estimate that 19 foreign banks will have to set up an IPU. Between them they operate via 53 subsidiaries and 53 branches, with 35, more than a third of the total, in Britain alone.

Britain leaves the bloc in March 2019, which makes having a “proper framework” for supervising non-eu banking operations “even more relevant”, a discussion paper, which was reviewed by Reuters and is dated Sept.1, said.

Separately, the bloc has already proposed that clearing houses that handle large amounts of eurodenominated assets should be jointly supervised by Brussels after Brexit.

Subsidiaries of foreign lenders make up 42 percent of banking subsidiaries in the bloc, up from 36 percent in 2008, but EU regulators have only “limited access” to timely data on what goes on across these operations, the document said.

“As a consequence, the supervision of subsidiaries that belong to the same thirdcountry group, but operate in different member states is fragmented and hence might result in regulatory and supervisory arbitrage.”

An IPU would “not necessarily increase capital or liquidity requirements”, it added.

The European Central Bank, which supervises top euro zone lenders, and the Single Resolution Board, in charge of closing down those lenders if they fail, both want foreign branches, and not just subsidiaries, to come under IPUS.

The commission, however, is sticking to its view that branches should not be included. Subsidiaries are directly supervised by the country they are in, while branches are supervised mainly by the bank’s home country.

The EU proposal needs approval from member states and the European Parliament to become law, and major changes are often made during this process.