EU urged to reconsider IPU plan for foreign banks B2

Move would increase costs for Chinese lenders

The EU’s proposed requirement that non-EU banks operating in the bloc should establish intermediate parent undertakings (IPU) aims to strengthen oversight, but the move would add to the costs for foreign companies and hinder their growth in the market, experts said on Wednesday.

The People’s Bank of China (PBC), the country’s central bank, and the China Banking Regulatory Commission sent a comment letter on Tuesday to the European Commission, the Council of the EU and the European Parliament regarding the comprehensive package of proposals to further strengthen the resilience of EU banks.

The proposals, which were released by the European Commission in November 2016, require non-EU banks above a certain threshold to establish an IPU in the bloc.

Chinese authorities have not imposed any comparable IPU requirements on foreign financial institutions in China, according to the comment letter posted on the PBC’s website.

In light of the fact that the intended supervisory benefits may not be proportionate to the potential compliance cost, “we would ask for reconsideration of the threshold of 30 billion euros ($37 billion) for the proposed EU IPU requirements,” read the PBC letter.

Given that the EU branches of Chinese banks mainly conduct wholesale business for Chinese enterprises operating in the EU and only conduct minimal retail business, if these branches are obliged to be consolidated under an IPU, the exposure limit will be significantly reduced as the capital base will be smaller, which means they will have to renegotiate loan terms with existing clients and thereby suffer increased costs, according to the letter.

The EU aims to attract investment by requiring non-EU groups to set up IPUs, as it would bring the union increasing business and capital and could also help offer more jobs for local people, said Dong Dengxin, an expert at Wuhan University of Science and Technology. Dong told the Global Times on Wednesday that “a second motivation is that setting up IPUs there will facilitate regulation of the market.”

Zhang Jiayuan, a partner specializing in sports investment at Beijing-based Ransenhuizhi Investment Fund Management Co, agreed, saying that IPUs would help the local authorities manage foreign companies.

“But domestic firms do not want to be limited by the requirement” because setting up a parent firm in foreign markets would increase the cost of the companies’ foreign investment, Dong noted.

Setting up an IPU in the bloc will have various impacts on corporate governance and will increase policy risks for Chinese investors, Zhang said.