Britain to ease rules for branches of Chinese and other non-EU banks

PUBLISHED : Wednesday, 26 February, 2014, 3:07pm
UPDATED : Wednesday, 26 February, 2014, 3:07pm

Britain’s central bank set lighter conditions on Wednesday for branches of Chinese and other non-European investment banks as part of efforts to bolster London’s role as a financial centre.

The new rules reverse a previous policy of putting pressure on non-European Union lenders operating branches in Britain to turn those branches into standalone subsidiaries with their own capital and liquidity buffers – a costly undertaking.

The initial target of the new policy is China, but it would apply to lenders from any non-EU country, Andrew Bailey, chief executive of the Bank of England’s regulatory arm, the Prudential Regulation Authority (PRA), said in October.

Britain is hoping the City of London will become a major yuan hub outside China, and the two countries are holding talks about setting up a clearing bank in the British capital for the Chinese currency.

The PRA said in October it proposed allowing foreign banks to operate as more lightly regulated branches as long as they do not take deposits.

That policy followed Britain’s bruising experience with savers losing money when Iceland’s banking system collapsed in 2008 at the height of the financial crisis.

Britain had to compensate local holders of deposits in Icelandic banks and is suing Iceland to get the money back.

The rules, which the BOE put out for public consultation on Wednesday, stipulate that any non-European investment or retail bank can operate as a branch only if it meets three criteria, stopping short of a ban on non-European retail branches.

Branches must have an equally strict supervisor at home, insure deposits with a British scheme, and prove it can be wound up quickly in a crisis while maintaining access to deposits.

“Resolution will be a key deciding factor in the PRA’s judgments and is ultimately where it will place most emphasis when forming a view on its risk appetite towards branches operating in the United Kingdom,” the BOE paper said.

There are 145 branches of international investment and retail banks in Britain, accounting for 31 per cent of assets in the country’s banking system.

The regulation might bring new non-European branches to Britain, causing some minor effects on competition, the consultation paper, detailing the policy for new and existing branches, said.

There will also be a new rule requiring all non-EU lenders, whether deposit-taking or non-retail, to report data on a regular basis to the PRA by next year.

If a bank cannot meet the requirements to be or remain a branch, then it would have to become a subsidiary.