UK supervision of international banks post Brexit

Mon 25 Jan 2021

Around one-fifth of global banking activity is undertaken in the UK. Almost half of the UK’s banking assets are held by international banks. The PRA currently supervises approximately 250 international banks, both branches and subsidiaries, which are part of around 180 international groups.

Background

On 11 January 2021, the PRA shared in a Consultation Paper (CP) – its proposed approach to supervising the UK activities of PRA-authorised banks and designated investment firms that are headquartered outside of the UK or are part of a group based outside of the UK.

The PRA sets its expectations for:

• Receiving information concerning risks in the wider group these firms are part of, particularly where subsidiaries are highly integrated into their group. The PRA must be able to assess the risk posed to the UK market.
• Co-operation from entities and their home state supervisors. There should be sufficient equivalence between home and host regime, appropriate supervisory co-operation and an effective resolution regime.

The PRA ensure that those firms meet the ‘threshold conditions’, which are not different from the ones applied to UK groups firms.

A broadly unchanged supervisory approach

Overall, the CP confirms to international banks that supervision will remain stable and consistent following the UK’s withdrawal from the EU. There will not be any change to the thresholds considered when assessing operating structure; information shared, co-operation and controls for retail and wholesale businesses. It also provides clarity on the implications of the different ways firms may choose to structure their operations.

The proposal remains aligned with the existing Supervisory Statement (SS1/18 ‘International banks: the PRA’s approach to branch authorisation and supervision’) and “only” seeks to consolidate the existing approach and clarify or illustrate than proposing new requirements.

Consequences of Brexit to the industry landscape

The PRA reports that it has seen a significant restructuring of firms’ operations due to the UK’s withdrawal from the EU. Around 66 former EEA passporting firms have transitioned to the temporary permission regime and are pursuing authorisation to operate through UK branches. The number of systemic wholesale branches that the PRA supervises has risen by almost one-half and the assets held by such branches by around two-thirds.

In its proposal, the PRA confirms that the level of supervisory co-operation and information that subsidiaries of EU groups and supervisory authorities provided when the UK was part of the EU, is similar to the levels it will expect going forward.

Key expectations from the PRA

The PRA expects to access information regarding:

• The nature of the firm’s and group’s business model
• The financial resilience of the firm and its immediate overseas parent, including capital and liquidity positions 
• The operational resilience of the firm and group, including risks arising elsewhere in the group that may affect the ability of the firm to deliver its important business services 
• Material risks to the firm’s survival emanating from any group to which it belongs 
• Resolution planning, including information regarding the group’s preparations for resolution

In terms of a business model and risk management, the PRA expects the following:

• UK subsidiaries of international groups should be on a path to being structurally profitable on a standalone basis, and not be solely cost centres for the group with accumulated costs that are extinguished by periodic capital injections from the group
• The wider group to which the firms belong should demonstrate it has the capacity and willingness to support them under adverse conditions
• Given that the evolution in firms’ structures, notably due to Brexit, has led to increased intragroup flows of business, firms will need to demonstrate they have robust controls around booking arrangements, pre and post-trade.

The proposal does not introduce any new expectations with regards to governance arrangements but:

• Recommends that systemic wholesale branches assign a number of senior manager functions (SMF) who will ensure threshold conditions are met
• Reminds that the PRA considers it generally undesirable for key positions on the Board of a subsidiary, such as chair, chair of the key Board sub-committees, to be occupied by executive members of the group or parent Board

Finally, if necessary, the PRA has a range of supervisory tools and powers and can require the separation of the UK activities from the international group.

Timetable

The consultation period ends on 11 April 2021, and the final Supervisory Statement is expected to enter into force in the second quarter of 2021.

[1] Consultation paper [2] Draft supervisory statement