U.K. Seeks to Kill Foreign Bank Rule as Brexit Snare Looms

  • Teams up with Luxembourg to say planned EU law won’t work
  • ECB says banks’ tangled webs of units show law is needed

Brexit Triggered: What Happens Now?

The U.K. is trying to kill a planned European Union rule for foreign banks that will become crucial for its own lenders after Brexit.

Teaming up with Luxembourg, a host for many foreign banks’ EU units, London declared its opposition to plans to force banks from outside the bloc to consolidate their activities under a single entity, according to a document prepared for a meeting of member-state experts taking place Thursday and Friday and seen by Bloomberg News. That plan would only boost costs and complicate structures without helping supervision and resolution, the two said.

The European Commission, the bloc’s executive body, would require banks from abroad to set up an “intermediate parent undertaking” to head their businesses within the bloc. The aim is to ease resolution by having a company with its own capital and loss-absorbing debt available to fund its own demise should disaster strike, according to the commission.

U.K. banks could be among those for which this is required after Brexit, depending on the outcome of the British negotiations with the bloc. Government officials fear they could be left out of the main Brexit talks as it could be too difficult to reach a deal in the two-year time frame for talks.

To read a QuickTake Q&A on Brexit and British Banks, click here

“We do not share that assessment,” the U.K. and Luxembourg said about the EU’s rationale for the requirement. “We believe that compulsorily requiring all subsidiaries beneath an IPU would needlessly add to costs and complexity without enhancing the effectiveness of resolution strategies.”

The commission made the proposal as part of its review of the EU’s banking regulation. The rule would affect companies with assets of more than 30 billion euros ($32 billion) in subsidiaries and branches throughout the region, and units of global systemically important firms.

In a joint paper supporting the plan, also seen by Bloomberg News, the European Central Bank and the Single Resolution Board, the body responsible for handling failed banks in the euro area, argue that setting up an IPU might help thin out the thicket of entities that have sprung up around the region as both branches and subsidiaries.

As an example, the paper points out that London-based HSBC Holdings Plc’s U.S. unit HSBC Bank USA NA also has a branch in London. There are 176 third-country branches in the EU that belong to 114 foreign groups, according to the paper. At least 16 of the groups would have to establish an IPU on the basis of their systemic importance.

‘Non-Transparent Structures’

“The increasing complexity of the organizational structure of third country groups is one of the main challenges to an effective supervision of a group’s risks and activities,” the ECB and the SRB said in the joint paper. “Complex or non-transparent structures in a cross-border banking group may pose financial, legal, reputational and other risks.”

The U.K. and Luxembourg argue that EU authorities can already require an intermediate holding company to be set up. The proposal is poorly thought out and lacked prior consultation and an impact assessment, the two said, calling for “further consideration and analysis”.

While the commission’s proposal doesn’t cover branches, the ECB argues that they should be folded into the IPU. The Commission only considers the assets held at branches of third-country lenders for assessing whether the group meets the size threshold for having to set up an IPU, a calculation also rejected by the U.K. and Luxembourg.

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