Britain has outlined a new set of rules that will involve either overhauling the legal structures of Indian bank branches here or stopping of retail banking services unless there is “a very high level of assurance” from Indian bank regulators in the event of their failure.
The new rules are part of Britain’s efforts to minimise risks and safeguard the country’s banking system and avoid any adverse fallout from any failure of international banks who accept deposits through their branches here.
A Bank of England spokesperson told HT that the rules are expected to come into effect around September.
The rules mainly affect ‘branches’ of international banks and not ‘subsidiaries’. According to the Bank of England, there are 145 branches of international banks operating in Britain, accounting for 31% (2.4 trillion pounds), about `245.93 lakh crore at current exchange rates, of the total assets of the banking system.
The five Indian banks operate branches in the UK and cater mainly to the large Indian diaspora. They are Bank of Baroda, Bank of India, Export-Import Bank of India, Syndicate Bank and State Bank of India.
The four Indian banks that operate as ‘subsidiaries’ are Union Bank of India, Punjab National Bank, ICICI Bank and Axis Bank.
Indian banks that operate branches will have to go through a lengthy overhaul of their legal structures into subsidiaries or deliver what is called “a very high level of assurance” from the bank regulator.
The five Indian banks here did not respond for requests for comment.
International-headquartered banks can either operate in the UK as subsidiaries or lightly-regulated branches. A subsidiary is a separate legal entity from its parent, and as such, requires its own governance and risk management, as well as meeting capital and liquidity requirements in the UK.
The Prudential Regulation Authority (PRA) of the Bank of England has issued a consultation paper outlining the new rules. The spokesperson said the consultation will close in by the end of May and the new rules are expected to be implemented three months later.
For branches of Indian and other international banks, the new framework focuses on two main tests: Whether the supervision of the firm in its home state is equivalent to that of the PRA and whether the PRA has assurance from the home supervisor over the firm’s resolution plan in a way that reduces the impact on financial stability in the UK.
In line with these tests, the PRA will determine whether the firm undertakes any critical economic functions in the UK.
“It is important that we get the right balance between maintaining our place as an open financial market while delivering our statutory objective of promoting safety and soundness in the firms we supervise,” Andrew Bailey, head of the PRA, said.