BoE confirms European banks will be allowed to operate as normal after Brexit
European banks will not be forced to convert their branches into subsidiaries, the Bank of England confirmed.
The Bank of England has confirmed that European banks will be allowed to operate under existing rules after Brexit, easing the burden for the financial services industry which has urged negotiators to strike a cross-border deal.
It means European banks will not need to convert their branches in the UK into subsidiaries – a move which would have created additional financial burdens on those institutions.
The central bank said it made the decision on the assumption that a “high degree of supervisory cooperation with the EU” would continue after Britain leaves the bloc.
Subsidiaries in the UK stand as separate legal entities and are required to hold large capital reserves in case of a market crash, which is meant to stop them from pulling out in such an event and taking customers’ funds with them.
Those capital requirements do not apply to branches.
The Bank of England said: “Keeping the UK’s financial system open to foreign institutions is in the best interests of the UK, EU and global economies.
“The UK’s financial sector also brings substantial benefits to EU households and firms, allowing them to access a broad range of services efficiently and reliably.”
There are currently 160 international bank branches operating in the UK, 77 of which are from the European Economic Area (EEA), with assets of more than £4 trillion.
That is on top of 110 foreign insurance branches, with 80 from the EEA.
If foreign banks were forced to convert their branches to subsidiaries after Brexit, it is believed that many firms would decide to leave the UK altogether rather than taking on the additional costs – reported to be in the billions of pounds.
An exodus would subsequently hit Government coffers, as financial services account for a large proportion of the UK economy and generate billions in tax, and potentially put thousands of jobs on the line.
Some changes may be introduced for insurers from outside the EU, however.
The central bank currently requires foreign banks from outside the EU, which hold a “material” amount of UK retail deposits, to operate through subsidiaries, and said the approach could be extended to insurers, based on the size of the business.
The Bank of England reiterated in its announcement that the concentration of financial services in the UK helped to lower costs across the industry, in turn supporting international trade and cross-border investment.
It said: “Fragmentation of the UK’s financial sector could increase the cost of financial intermediation, to the detriment of households, firms and governments in the UK, EU and elsewhere.”
Its regulatory plans should ease the burden on banks, insurers and asset managers that have been waiting for any news over the post-Brexit fate.
Catherine McGuinness, policy chairman at the City of London Corporation, said: “Allowing European wholesale banks to operate as normal in the UK after March 2019 is a welcome bit of news to end the year for the City.
“EU banks are a significant element of the 1.1 million jobs and £72 billion that the financial services sector generates in tax revenues each year.
“They are also one of the many elements, along with our openness and attractiveness to international business, that make us such an attractive global financial centre.”
She said the move would provide “greater certainty” that businesses have been craving.
“We are pleased to see this development and it is now up to our politicians and regulators to make sure this is delivered,” she added.