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The Bank of England is looking at controversial plans to force more international banks to set up subsidiaries in Britain, people familiar with the situation told the Financial Times.
The move could reduce the threshold that requires foreign banks with corporate businesses in the country to set up subsidiaries, with their own capital and liquidity. The BoE is considering it as part of its review of Silicon Valley Bank’s dramatic collapse this year, the people say.
Subsidiaries – like the one SVB has in London – allow local regulators to take control of failing banks rather than leave their fate to the discretion of their parental supervisors.
But forcing more banks to set up such units would likely prove unpopular with the industry, as large subsidiaries were more expensive than simply maintaining a UK branch.
“The ability to leverage branch structures is a key 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 nearly 200 foreign banks doing business in the UK.
He added that any change in threshold would need to be “assessed with caution, so as not to dissuade international banks from operating in the UK and providing essential liquidity and capital”.
Sam Woods, head of the BoE regulatory agency, said in March that the UK hosts more than 150 branches with around £6.3tn in assets.
According to the BoE report, these branches include 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 were “legitimate questions. . . Is that threshold in the right place? Maybe somewhere else?”
However, tougher requirements could conflict with government bids to make UK financial services more competitive and a new secondary mandate for the BoE to factor competitiveness into its decisions.
Currently, the BoE’s supervisory approach suggests that a bank with £100 million of retail and “small company transactional deposits” should set up a subsidiary.
The BoE guidelines also indicate that, if a bank has more than 5,000 retail customers and is a small company, it may also need to set up a subsidiary. However, he added that this was not a “hard” threshold and “may vary from company to company”.
People familiar with the situation told the FT that the SVB’s failure – which some believe highlighted the benefits of a subsidiary – prompted the BoE to re-evaluate the threshold.
SVB’s London-based operations became a subsidiary six months before its parent company’s explosion in March, allowing the BoE to take control of its UK operations after experiencing difficulties.
At the time, SVB had nearly £9 billion in deposits, most of them linked to corporate customers, who were rallying political support for the rescue.
The government quickly brokered a £1 sale to HSBC, ensuring full coverage of deposits for the UK technology company and other groups that depended on the bank.
People familiar with the situation added that the question of forcing more banks to set up subsidiaries had been discussed with City Secretary Andrew Griffith in recent weeks. The BoE and Treasury declined to comment.
While the government would like to have the option of intervening when necessary to help British corporate clients of failing banks, it has hesitated to place further burdens on lenders.
“You can’t do one size fits all,” said a person familiar with the Treasury’s initial position. “If there is a branch, the UK government and the Bank of England are not left with obligations to a large extent. Immediately upon becoming a subsidiary, there are different levels of transparency and implied responsibility. . . That’s not clear.
If the BoE decides to make changes, it will probably start by launching an industry consultancy, a person familiar with the process told the FT. The Ministry of Finance will be kept informed.
The collapse of the SVB has also prompted the BoE to review the UK deposit insurance underwriting scheme and regime for dealing with bank bankruptcy.
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