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Bank of England considers changes to regulation of foreign bank branches

by Jessica Weisman-Pitts
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2023 10 16T155619Z 2 LYNXMPEJ9F0O1 RTROPTP 4 GOLDMAN SACHS BRITAIN BOE

Bank of England considers changes to regulation of foreign bank branches

By Huw Jones

LONDON (Reuters) -The Bank of England said on Monday it was thinking about possible changes to how it regulates branches of foreign banks, and flagged a likely easing in how it intends to apply global bank capital rules from mid-2025.

The operations of California-based Silicon Valley Bank in Britain had been treated as a branch for 10 years before being required to become a subsidiary, which made it easier to engineer a rapid takeover by HSBC after SVB’s parent bank in the United States collapsed earlier this year.

BoE Deputy Governor Sam Woods said the central bank is now thinking about its regulatory approach to branches, which are largely supervised by regulators in their home countries. Subsidiaries are directly regulated by the BoE and must hold their own capital cushions.

London is a magnet for foreign bank branches, which Woods said was a key part of Britain’s hosting of a competitive global financial centre.

“That is not going to change,” Woods told the annual Mansion House dinner for the financial sector in London’s City, adding that he would be considering “targeted areas for improvement.”

The experience with SVB UK raised an uncomfortable question for the BoE on how it decides a branch must convert to a subsidiary, based on level of deposits.

“Can we rely on our existing criteria on branch activities to spot and address other firms that might grow to resemble SVB UK?” Woods said, adding that the focus would be on foreign branches that provide critical functions.

BASEL FEEDBACK

The collapse of SVB and Credit Suisse, which was taken over by UBS earlier this year, raised questions about rules introduced after the 2008 global financial crisis to deal with failing lenders without taxpayer said.

“Without the post-crisis reforms, the failures of CS or SVB could have been the dominos that knocked over the entire global banking system,” Woods said, adding there was more work to do to ensure banks can fail in a controlled, non-contagious manner.

More capital and liquidity would not necessarily be the answer to issues raised by this year’s banking turmoil as the best rules would be useless without effective supervision and sustainable bank business models, Woods said.

Britain, like the United States and Europe, is implementing the final leg of tougher “Basel III” capital rules introduced after the 2008 crisis.

Banks have lobbied hard to dilute BoE proposals on Basel, and Woods said that following “very clear feedback” on issues like loans to small or unrated companies, he was confident “we will be able to evolve them in a way that reflects legitimate concerns”.

The failure of SVB, a relatively small bank, will not stop the BoE from putting forward “material simplifications” to capital rules for small lenders, Woods said.

(Reporting by Huw JonesEditing by William Schomberg and Paul Simao)