The Bank of England is looking at contentious plans to force more international banks to set up subsidiaries in the UK, people familiar with the situation have told the Financial Times.
The move could reduce the thresholds requiring foreign banks with corporate business in the country to set up subsidiaries, with their own capital and liquidity. The BoE is considering it as part of a review of the dramatic collapse this year of Silicon Valley Bank, the people said.
Subsidiaries — such as SVB had in place in London — enable local regulators to seize control of failing banks rather than leaving their fate to the discretion of their parents’ supervisors.
But compelling more banks to set up such units would be likely to prove unpopular with industry, since full-blown subsidiaries are more expensive than merely maintaining branches in the UK.
“The ability to utilise branch structures is an important part of what makes London a successful and connected international financial centre,” said Giles French, chief executive of the Association of Foreign Banks, which represents close to 200 foreign banks doing business in the UK.
He added that any change in thresholds would need to be “carefully assessed, so it doesn’t deter international banks from operating in the UK and providing essential liquidity and capital”.
Sam Woods, the head of the BoE’s regulatory arm, said in March that the UK hosted more than 150 branches with about £6.3tn in assets.
According to BoE reports, such branches included ABN Amro, Korea Development Bank and CaixaBank as of June.
Referring to the level at which banks should be required to set up subsidiaries, Woods added that there was “a legitimate question . . . Is that threshold in exactly the right place? Might it be in another place?”
But toughening such requirements could clash with the government’s bid to make UK financial services more competitive and a new secondary mandate for the BoE to consider competitiveness in its decisions.
At present, the BoE’s supervisory approach suggests that banks with £100mn of retail and “small company transactional deposits” should establish a subsidiary.
The BoE’s guidance also indicates that, where a bank has more than 5,000 retail and small company customers, it may also need to set up a subsidiary. However, it adds that these are not “hard” thresholds and “may differ on a firm-by-firm basis”.
The people familiar with the situation told the FT that SVB’s failure — which some believe highlighted the benefits of subsidiaries — prompted the BoE to re-evaluate those thresholds.
SVB’s London-based operation became a subsidiary six months before its parent company’s implosion in March, enabling the BoE to seize control of the UK operation once it ran into difficulty.
At the time, SVB had deposits of almost £9bn, mostly corresponding to corporate customers, who galvanised political support for the rescue.
The government rapidly brokered a £1 sale to HSBC, ensuring full coverage of deposits for UK tech companies and other groups dependent on the bank.
The people familiar with the situation added that the question of compelling more banks to establish subsidiaries had been discussed with City minister Andrew Griffith in recent weeks. The BoE and the Treasury declined to comment.
While the government is keen to have the option of intervening when necessary to help British corporate clients of failing banks, it has reservations about heaping further burdens on lenders.
“You can’t do one size fits all,” said a person familiar with the Treasury’s initial position. “If something is a branch, the UK government and the Bank of England doesn’t get left with the liabilities at large. As soon as it is a subsidiary, there’s a different level of transparency and implied responsibility . . . It’s not clear cut.”
If the BoE decides to pursue the changes it would probably begin by launching an industry consultation, a person familiar with the process told the FT. The Treasury would be kept informed.
SVB’s collapse has also prompted the BoE to review the UK’s deposit insurance guarantee scheme and the regime for handling bank insolvencies.