November 29, 2017 / 12:18 PM / a year ago

Banks view turning branches to subsidiaries as Brexit 'red line'

LONDON (Reuters) - Foreign banks in Britain view any attempt to make them convert their branches to subsidiaries after Brexit as a “red line” which would likely cause them to rethink their presence in the country, an industry report said on Wednesday.

The late winter light shines on the buildings in the City of London financial district of London, Britain November 24, 2017. REUTERS/Simon Dawson

Deputy Governor of the Bank of England Sam Woods said earlier this year that branches of European Union banks in London might have to apply to become subsidiaries after Britain leaves, a costly exercise that involves building up capital and reserves locally.

Several European banks base the bulk of their investment banking activities, such as sales and trading, in London, operating via a branch structure that relies on capital held by their parent and are mainly supervised by their home regulator.

“A requirement to subsidiarise was a clear “red line” for most branches, with both EU and non- EU branches confirming that a subsidiarisation approach would cause them to reassess their presence in the UK, possibly leading to the closure of the UK branch,” the report by the Association of Foreign Banks (AFB) and law firm Norton Rose Fulbright found after surveying senior executives from global banks.

Woods has said that he will have to decide by Christmas if branches of EU financial firms in London must convert to subsidiaries and be directly supervised by the (Prudential Regulation Authority) PRA.

British regulators have been comfortable with this situation with Britain as part of the EU, but once Britain leaves they will want these banks to have enough capital to support their business and ensure that British taxpayers are not left footing the bill in a crisis.

The focus so far has been on banks based in Britain applying for licences to operate on the continent once Britain leaves the EU.

Deutsche Bank has 9,000 staff based in Britain, while BNP Paribas has around 6,500 staff in the country, where it bases the bulk of its investment banking business and Societe Generale has some 4,000 staff in Britain.

“A significant majority of EU branch respondents said that enforced subsidiarisation would cause them to reconsider their presence in the UK, with the two most likely outcomes being reallocation of regulated activity into the EU, or closure of London branches and withdrawal from the UK altogether,” the report added.

A report from Boston Consulting has estimated the switch to a full subsidiary structure could cost European banks around 40 billion euros (billion) in extra capital

Some respondents said that one solution would be to allow branches to continue operating where the parent entity is in a similarly regulated market and only insist on subsidiary status if there was UK deposit taking activity.

($1 = 0.8447 euros)

Reporting by Anjuli Davies; editing by Alexander Smith

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