The Bank of England (BoE) has today announced it will allow European wholesale banks to operate as branches in the UK after Brexit, removing the threat of a much stronger regulatory regime which bankers feared would harm their profits.
European wholesale banks and insurers will be able to apply for authorisation to operate as a branch in the UK after Brexit, rather than a subsidiary with higher capital requirements.
In a letter to bank bosses, published today, BoE deputy governor Sam Woods said banks without could apply for branch status starting in January.
Bankers much prefer branches to subsidiaries, the other alternative, as the latter must hold significantly higher capital, dragging on profits – although some regulators argue subsidiaries are safer, because capital cannot be rapidly withdrawn across the border.
However, banks offering services to retail customers will have to create a fully capitalised subsidiary.
EU wholesale banks in the UK – accounting for £4 trillion of the UK market – currently operate as branches within the EU’s Single Market. That option will not be possible after Prime Minister Theresa May at the start of the year definitively ruled out staying within the Single Market, forcing regulators to make significant adjustments.
The BoE's olive branch will in effect create a special regime for European banks compared to other third countries. It has been extended on the basis that there will "continue to be a high degree of supervisory cooperation between the UK and the EU", according to the BoE's statement.
The BoE said its approach was based on the principle that "openness supports economic dynamism through a range of channels, raising growth and boosting living standards."
The chancellor, Philip Hammond, gave his blessing to the BoE's announcement.
He said: “The measures announced by the Bank of England and the FCA today will ensure that the UK's exit from the EU is smooth and orderly, will underpin the UK’s status as a global financial services sector and will ensure that UK consumers are protected.”
Bank representatives welcomed the moves as well. Simon Lewis, chief executive of AFME, a European investment bank lobby group, said: “We welcome the Prudential Regulatory Authority’s confirmation that EU27 banks will be able to continue to operate their wholesale business through their existing branches in the UK post-Brexit. This provides welcome clarity for firms, enabling them to proceed with their Brexit planning and avoiding additional fragmentation of capital within Europe."
Relieved bank lobbyists and lawyers welcomed the move, although warned much more work was still necessary to secure banks’ trade status post-Brexit.
Catherine McGuinness, policy chair at the City of London Corporation, described it as a “welcome bit of news to end the year for the City.”
She said: “This development would provide greater certainty that businesses always crave. We are pleased to see this development and it is now up to our politicians and regulators to make sure this is delivered.”
Tony Anderson, banking partner at law firm Pinsent Masons, said the move “augurs well for London maintaining its status as a global financial centre”, but warned trade barriers or regulatory divergence between the UK and the EU could still cause big problems for EU banks.