[LONDON] Nineteen banks in the European Union will need to set up new holding companies that regulators can scrutinise them more closely, an EU discussion paper says, mirroring steps taken by the United States. The European Commission suggested last November that banks headquartered outside the bloc consolidate their EU activities under an “intermediate parent undertaking” or IPU in reaction to US moves to require foreign banks to set up such companies. The commission, that is the executive of the EU, has made a preliminary estimate that 19 foreign banks will need to set up an IPU and has fleshed out its thinking. Between them they function via 53 subsidiaries and 53 branches, with 35, over a third in Britain alone. Britain leaves the bloc in March 2019, making using a”proper framework” for supervising non-EU banking operations”even more applicable”, a discussion paper, which was reviewed by Reuters and is dated Sept 1, said.
The bloc has suggested that clearing houses that handle large amounts of euro-denominated assets should be jointly supervised by Brussels after Brexit. Subsidiaries of foreign lenders constitute 42 percent of banking subsidiaries in the bloc, up from 36 percent in 2008, but EU regulators have only “limited access” to timely data on what goes on across these operations, the document said. “As a result, the supervision of subsidiaries that belong to the same third-country group, but operate in different member states is fragmented and hence might result in regulatory and supervisory arbitrage.” An IPU would “not necessarily raise capital or liquidity requirements”, it added. The European Central Bank, which supervises the Single Resolution Board, as well as euro zone lenders, in charge of closing down those lenders if they fail, both desire branches, and not subsidiaries, to come under IPUs. The commission, however, is sticking to its view that branches should not be included. Subsidiaries are supervised by the country they are in, while branches are supervised mainly from the bank’s home country. The EU proposal needs approval from the European Parliament and member nations to become law, and major changes are often made during this process. The 19 banks are Bank of America, Citi, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley, Mitsubishi UFJ Financial Group, UBS, Bank of New York Mellon, Industrial and Commercial Bank of China, State Street, Sumitomo Mitsui Financial Group, Mizuho Financial Group, Wells Fargo, Bank of China Ltd, Agricultural Bank of China Ltd, China Construction Bank Corp, Nomura Holdings, and Royal Bank of Canada. The document said the benefits to financial stability of producing IPUs would “clearly outweigh” unquantified potential one-off costs of reorganisation. REUTERS