VALLETTA • The European Central Bank (ECB) has proposed that large branches of foreign banks in the European Union be subject to tighter regulation and capital requirements, a move that would increase US and Asian lenders' costs and hit British banks after Brexit.
The ECB proposal, seen by Reuters, says a draft piece of legislation on foreign bank regulation already under discussion among the 28 EU members should be toughened further. The draft rules, proposed by the EU executive commission in November, require foreign lenders with a major presence in the EU to combine their businesses in the region into a separately capitalised holding company.
The proposal is aimed at ensuring that foreign banks classed as globally systemic lenders or those with at least €30 billion (S$44.8 billion) of assets in the EU are able to sustain significant losses without support from their headquarters.
It has already met strong opposition from non-EU banks, which say it would significantly raise the cost and bureaucracy of operating in the EU.
But now the ECB is proposing the law goes further and requires branches of foreign banks to be included in the EU holding company, a move that would likely raise foreign lenders'capital requirements. The draft law had exempted branches.
The ECB said it was making the proposal more comprehensive as it was concerned that the draft law could lead to "regulatory arbitrage" where banks booked important transactions in branches in order to reduce the level of assets that would be subject to the holding company's capital requirements.
The proposed changes would also bring the draft EU law in line with similar rules faced by large foreign banks in the United States, it said.
Currently, big lenders, like Goldman Sachs, JP Morgan Chase, Bank of America and the Industrial and Commercial Bank of China, carry out significant operations through branches in the EU rather than subsidiaries, the paper said, meaning the capital reserves they keep inside the bloc are lower, posing a higher risk to financial stability.
The ECB is also proposing that the holding companies be regulated by whoever supervises the largest individual entity within the group, which in practice would most often be the ECB. This would mark a broadening of the central bank's supervisory reach, partly at the expense of national securities watchdogs inside the EU.
Meanwhile, Bank of England governor Mark Carney yesterday called for Britain and the EU to agree to recognise each other's bank rules after Brexit, to avoid a damaging hit to financial services across Europe.