A quest by British regulators to protect local taxpayers by pruning the branches of global banks is riling the industry and risks running roughshod over a principle of free movement within Europe.
Britain's Financial Services Authority (FSA), which unilaterally published tough new liquidity rules for banks last year, is keen to stop banks operating in London from setting up branches. It prefers subsidiaries, which are easier to police.
This push for "subsidiarisation" has gathered steam since the collapse of Icelandic banks in 2008 left U.K. depositors empty-handed, shattering a European principle that national regulators will protect the interests of international clients.
While bankers have dubbed this drive "simplistic" and "troubling," lawyers note the FSA needs to leapfrog a so-called passporting rule, under which banks are allowed to set up branches across the 33-nation European Economic Area (EEA).
"One ... has to question whether there would, in fact, be sufficient appetite to agree such a change among the smaller (EU) member states, who could see a risk of being shut out of the major European financial markets," notes Ben Kingsley, a partner at London law firm Slaughter and May.
But analysts say the FSA is undeterred in its determination to ensure banks hoard cash in their international businesses, which could be expensive for both lenders and their customers — who will ultimately bear any added costs.
"Broadly it will make cash less fungible, which is bad for everybody's liquidity in normal times and potentially very bad for people's liquidity in bad times," noted one analyst.
"But the FSA clearly intends to drive this forward. It's the top of their agenda. They clearly believe there is a way of doing this."
Some bankers worry that the threat of subsidiarisation is building momentum in the Swiss city of Basel, where the FSA sits on the global committee of central bankers and supervisors that is finalizing the world's first global liquidity rules.
Simon Hills, a director of the British Bankers' Association trade body, calls for any Basel proposals to be "structurally neutral" for banks.
There is some industry sympathy for the FSA's desire to prevent a re-run of Iceland with tougher rules that would force more banking businesses in Britain to meet the UK's stringent capital and liquidity requirements and its prudential regime.
For supervision of cross-border banks that service customers beyond national boundaries through branches, subsidiaries or a mixture of both, has always been fragmented.
Branches fall under the jurisdiction of the "home" regulator of the parent bank, while subsidiaries are accountable to their "hosts."
Some of Europe's largest lenders, such as HSBC and Spanish-based Banco Santander — at least outside Spain — are already opting for subsidiaries.
But others believe the FSA's drive spells an unwelcome interference into how banks allocate their resources internally and exposes them to more local taxes.
"I can understand the FSA's position, but it is troubling," said one insider at an international investment bank in London.
"It's probably not a good idea for regulators to try to dictate too much how firms should organize themselves structurally, because firms didn't get to where they are by mistake."
Barclays Chief Executive John Varley dismissed subsidiarisation a "false friend."
"It's possible to be simplistic in one's advocacy of benefits of subsidiarisation," he told a Parliamentary committee investigating the causes of the financial crises that has left western economies struggling under crippling debts. "There are other ways one can ... sterilize risk."
Under the passporting regime, banks are entitled to establish branches in the 33 EEA states that link the 27 members of the EU with Iceland, Liechtenstein and Norway.
While it awaits any modification of those rules, the FSA is using what one lawyer called "strong-arm tactics" to dissuade at least one bank from setting up new branches.
"Obviously, the FSA will use whatever tools are at its disposal to try and get the maximum amount of control it can," he said. "There are different ways to skin a cat."
© 2022 Thomson/Reuters. All rights reserved.