Supervising international banks: the PRA’s approach to branch supervision
On 5 September 2014, the Prudential Regulation Authority (PRA) issued a policy statement on supervising international banks (PS8/14). Its objective is to ensure the safety and soundness of firms and thereby reduce the threat to the stability of the UK financial system.
In PS8/14, the PRA sets out its final policy approach to supervising UK branches of international banks (that is, banks based outside the European Economic Area (EEA)), confirming proposals in its February 2014 consultation paper (CP4/14).
The PRA also explains in more detail its approach to subsidiaries and branches.
The responsibilities for the prudential supervision of branches are split between the supervisor where the bank is headquartered — the home state supervisor (HSS) — and the PRA. In terms of establishing a branch in the United Kingdom, non-EEA deposit-taking branches need to be authorised by the PRA (ie the whole firm is required to meet the Threshold Conditions) whereas EEA firms have European Union (EU) treaty rights to passport into other Member States.
For branches from outside the EEA, the framework focuses on three main factors:
- an assessment of the equivalence of the home state’s supervision of the whole firm;
- the branch’s UK activities; and
- the level of assurance the PRA gains from the home states’ supervision over resolution.
Where the PRA is satisfied of these factors, it will also need to have a clear and agreed split of prudential supervisory responsibilities with the HSS. Where the PRA is not satisfied, it will consider the most appropriate course of action. This could include refusing authorisation of a new branch or cancelling the authorisation of an existing branch.
In addition, the PRA will be content for non-EEA branches undertaking retail banking activities beyond de minimis levels (less than £100 million in account balances and fewer than 5,000 customers) only if there is a very high level of assurance from the HSS over resolution. The PRA also expects new non-EEA branches to focus on wholesale banking and to do so at a level that is not critical to the UK economy, ie an interruption to the provision of service would not cause financial instability in the United Kingdom. This position is driven by two factors:
(i) Continuity of access to transactional accounts (eg current accounts) is important for depositors.
In resolution, where there is uncertainty over the financial position of a firm, such continuity cannot necessarily be provided which could potentially lead to disruption and uncertainty for individuals and to wider financial instability. For this factor the PRA will determine its risk-appetite based on the value and type of accounts, the number of customers, substitutability and any planned growth.
(ii) Eligible deposits of non-EEA branches covered by the Financial Services Compensation Scheme (FSCS) (up to £85,000 per eligible depositor per authorised deposit-taker).
In the event of failure, if the FSCS was unable to recoup the amount it paid out via the bank insolvency, there would be a liability to the UK financial system. Given this, the PRA expects to have a very high level of assurance about resolution for those firms which could potentially cause a material liability to the FSCS, including an understanding of where the FSCS would rank in the creditor hierarchy in a home state insolvency. Where this is not the case these non-EEA branches will fall outside of the PRA’s risk-appetite. In terms of setting a threshold for this factor, the PRA will collect better data on corporate deposits in non-EEA branches in the Branch Return.
To implement its approach on branch supervision, the PRA Board has created the PRA Rulebook: Branch Rules Instrument 2014 (PRA 2014/23) on 2 September 2014. The instrument was published, and came into force, on 5 September 2014. The PRA has amended the Glossary Part of the PRA Rulebook, and introduced a new Incoming Firms and Third Country Firms Part. A new rule in the Incoming Firms and Third Country Firms Part requires internationally headquartered banks to take all steps within their control to ensure that their resolution plan provides adequately for the resolution of their UK branches.
In CP4/14, the PRA also consulted on a draft supervisory statement setting out its new approach to branches in more detail. The final supervisory statement (SS10/14) has been published alongside PS8/14. The PRA explains on its PS8/14 webpage that the feedback received to CP4/14 led it to make minor changes to the supervisory statement, to improve its clarity.
In addition, the PRA consulted, in CP4/14, on a rule that would introduce a twice-yearly data return, applicable to all EEA and non-EEA branches, which would provide information about their UK activities (the branch return rule). In PS8/14, the PRA explains that it plans to bring this rule into force at a later date, after a second pilot exercise. It is in the process of producing accompanying notes for the branch return. The second pilot will involve asking branches to complete a slightly revised branch return to that used in the first pilot. The branch return and accompanying notes will be sent to all branches by 30 September 2014, to be returned by 14 November 2014. Following review and analysis of the second pilot, the PRA will publish the branch return rule, an accompanying policy statement and the final branch return.
Conclusion
Where serious concern exists on how non-EEA branches would cope if things go wrong and there is not sufficient assurance provided by that bank’s home state, then the PRA may revoke the branch’s authorisation to operate in the UK.
In such circumstance, a firm may choose to apply to operate as a subsidiary in the UK, which would need approval for authorisation by both the PRA and the FCA. Subsidiaries are separate legal entities from their parent, are authorised and separately regulated and supervised by the UK supervisory authorities. They are also separately capitalised and their eligible deposits are protected under the FSCS.
For further information relating to the issues in this article, please contact:
Asil Robertson
Direct Dial: +44(0)20 7842 1498
E-mail: [email protected]
Or
John North
Direct Dial: +44(0)20 7842 1490
E-mail: [email protected]
Or
Stewart Wilkinson
Direct Dial: +44(0)20 7842 1460
E-mail: [email protected]
The information in this article refers to the law at the date the article was written and is provided for general information purposes only. It should not be applied to specific circumstances without prior consultation with a solicitor.