The PRA has published Consultation Paper 4/14: Supervising international banks: the PRA’s approach to branch supervision (CP4/14).
In CP4/14, the PRA sets out its proposed approach to supervising international banks, with a specific focus on UK branches of banks outside the EEA.
International headquartered banks can either operate in the UK as subsidiaries or branches. A subsidiary is a separate legal entity from its parent, and as such requires its own governance and risk management, as well as meeting capital and liquidity requirements in the UK. A branch forms part of the same legal entity as its head office, and does not have its own capital base or board as this is covered in the head office, though local governance is required.
The structure is also mirrored in relation to supervisory powers. For subsidiaries, the PRA has the same legal powers and follows broadly the same supervisory framework as for UK headquartered firms. However, the responsibilities for prudential supervision of branches is split between the supervisor where the bank is headquartered and the PRA.
The PRA has a clear framework for all types of firm it supervises, which takes into account the different legal requirements for branches and subsidiaries. For UK branches of banks from outside the EEA, this framework focuses on two main tests being whether the:
- supervision of the firm in its home state is equivalent to that of the PRA; and
- PRA has assurance from the home supervisor over the firm’s resolution plan in a way that reduces the impact on financial stability in the UK.
In line with the above tests, the PRA will determine whether the firm undertakes any critical economic functions in the UK. Depending on what these are, and their potential impact on UK financial stability, the PRA will make a judgement about whether it is content for the firm to operate as a branch in the UK.
In terms of establishing a branch in the UK, non-EEA deposit taking branches need to be authorised by the PRA (the whole firm is required to meet the Threshold Conditions) whereas an EEA firm has EU Treaty rights to passport into other Member States.
CP4/14 includes a draft supervisory statement which sets out the PRA’s approach to supervising international banks, a summary of the purpose of the statement, the purpose of the proposed rules, and an analysis of the costs and benefits and other impacts of the policy. It includes proposed changes to the PRA’s rules, in the Annex, to support the supervision of branches.
The draft supervisory statement builds on the PRA’s general approach as set out in its banking approach document.
The PRA intends to introduce a rule that requires all deposit taking and/or designated investment firms that operate through EEA and non-EEA branches to complete a new data collection return to be effective from 2015. The purpose of the return is to enhance the PRA’s understanding of the potential impact that branches could have on UK financial stability. The PRA intends to ask a sub-set of branches to complete the return during 2014 as part of the consultation process to assess its practicability and get detailed feedback.
The PRA also proposes to introduce a rule that will require non-EEA firms to take all steps within their control to have adequate provision made in resolution plans for UK branches. The purpose of the draft rule is to support the policy by which the PRA will assess the adequacy of the home state authority’s resolution planning in terms of its potential impact on UK financial stability.
Responding to CP4/14
The deadline for comments on CP4/14 is 27 May 2014.
View Bank of England approach to supervising international banks, 26 February 2014