Exclusive: ECB calls for tougher regulation of foreign bank branches

Thu Apr 6, 2017 12:07pm EDT
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By Francesco Guarascio

VALLETTA (Reuters) - The European Central Bank 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 U.S. and Asian lenders' costs and also hit British banks after Brexit.

The ECB proposal to European Union states, seen by Reuters, says that 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 capitalized holding company.

The proposal is aimed at ensuring that foreign banks classed as globally systemic lenders or those with at least 30 billion euros of assets in the EU are able to sustain significant losses without support from their headquarters.

It has already been met with strong opposition from non-EU banks who 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 changes it proposes would also bring the draft EU law in line with similar rules faced by large foreign banks in the U.S, it said.   Continued...

FILE PHOTO: The headquarters of the European Central Bank (ECB) are illuminated with a giant euro sign at the start of the "Luminale, light and building" event in Frankfurt, Germany, March 12, 2016.   REUTERS/Kai Pfaffenbach/File Photo