A Brexit Logjam Is Looming at the Bank of England

Updated on
  • EU banks to become third-country lenders when passporting ends
  • Issue arises of BOE’s resources needed for authorizations

The Bank of England in London.

Photographer: Simon Dawson/Bloomberg

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A logjam is looming at the Bank of England as almost 80 foreign banks that are operating U.K. branches decide on their future in post-Brexit Britain.

The first choice for lenders from the European Union using the passporting mechanism for their U.K. business -- a device that will no longer be available after Brexit -- is whether to stay or go. For those who remain, the question is whether to seek authorization from the BOE’s Prudential Regulation Authority to continue as a branch -- albeit now of a third-country bank -- or to incorporate as a U.K. bank with its own capital and prudential requirements.

The timing of and potential delays to that process are becoming an issue for two main reasons. The U.K. will exit the bloc in about 18 months, about the length of time lawyers say it can take to get authorization. The second issue is the PRA’s resources -- over the past 12 months it has issued licenses at a rate of about one every two months, a pace that might need to be stepped up.

“If they have to process 80 applications in the next 18 months, they’re going to find that very difficult,” said Dominic Hill, a financial services partner at law firm Hogan Lovells in London. “They might be worried about the systemic risk they’re taking on by allowing lots of new branches to open. This would be a significant addition to the risk that they’re facing.”

Bank branches operate as extensions of their parent company, which offers flexibility in moving funding and capital around. That’s because the home-state regulator takes most of the responsibility for safety and soundness. In contrast, a subsidiary is supervised locally as a standalone entity, meaning the host supervisor has to take much less on trust, Hill said.

U.K. Dilemma

A PRA spokesman referred to letters by Chief Executive Officer Sam Woods and declined to comment further. In an exchange with lawmaker Nicky Morgan this month, Woods underlined that the authorization and supervision of a large number of new firms “is likely to place a material extra burden on the PRA’s resources,” posing a “material risk to our objectives.”

U.K. authorities face a dilemma. A very demanding approach that makes it difficult or costly for banks to operate in Britain risks scaring them away. But the minimal requirements that were common under the EU’s passporting regime may not be commensurate with the responsibility U.K. regulators have for foreign banks’ entities now.

To open a U.K. operation a third-country applicant must fill out an exhaustive 41-page form, helped by 38 pages of notes, submit -- among much else -- a business plan, demonstrate how it will maintain liquidity and offer an overview of the parent company’s resolution plan, according to the BOE website. Attaching two hard copies and two electronic copies of all documents, one for the PRA and the other for the Financial Conduct Authority, plus a non-refundable check for 25,000 pounds ($32,000) sets the wheels in motion.

The PRA then has six months for a decision if the form is complete when it is submitted, 12 months if not. The regulator also likes to have “a number of structured formal meetings” with applicants before the form is handed in, to explain the process, identify potential concerns and help “submit as complete an application as possible.” It’s ultimately for the PRA to say whether a branch or a licensed bank is the appropriate legal form.

More Welcoming

The U.K.’s attitude to third-country branches is more welcoming than that of other jurisdictions, a legacy of efforts to attract U.S. and Japanese banks to London’s wholesale markets. That welcome doesn’t extend to deposit-taking: The regulator caps that at 100 million pounds for branches -- except for those of EU lenders.

An example for a bank will lose that privilege is Svenska Handelsbanken AB, which gets about 15 percent of revenue from more than 200 branches in the U.K., data compiled by Bloomberg show. Handelsbanken is “very firmly committed” to the U.K. market, CEO Anders Bouvin told Bloomberg TV’s Francine Lacqua, and is preparing for the “possible conversion of the U.K. branch into a subsidiary” for when the country withdraws from the bloc.

Depositors in a branch of a non-U.K. lender such as Handelsbanken’s have to look to the deposit insurance system of the bank’s home state for payment if anything goes wrong.

Some banks may decide to sidestep the PRA altogether and stop taking deposits, said Bob Penn, a partner at Cleary Gottlieb Steen & Hamilton in London. That would mean applying for authorization from the FCA alone, reducing the risk of being forced to become a subsidiary, as long as the PRA didn’t classify them as a “designated investment firm” and reel them back in.

While the EU authorities have been beating the drum for banks wanting to establish units in the bloc to be able to continue using their passports, publicly the U.K. hasn’t been as vocal about the need to get the approval process moving.

“Europe’s trying to get as many London banks as possible to set up on the Continent,” said Rob Moulton, a partner at Latham & Watkins in London. “They want them to hit the panic button. Instead, we want the business to stay, so we need to be as helpful as possible.”

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