The Bank of England announced its intentions to unveil a plan to make it easier for European banks to continue operations in the U.K. The goal is to make sure they will be able to maintain business as usual even after Brexit has occurred.
E.U. Banks to Use Existing Rules
Banks from the European Union but that operate in the United Kingdom to offer wholesale finance will be able to keep up their operations under the current regulations, reported the BBC. Wholesale finance refers to money and services that are provided both to businesses as well as to each other.
This will make it possible for E.U. banks operating through branches in the U.K. to keep up their current business without having to establish subsidiaries. This is welcome news to those banks, as setting up subsidiary banks is a costly process and one they would prefer to avoid.
Branches vs. Subsidiaries
Bank branches are a notably easier way for financial institutions to be able to move money from one international operation to the next. However, branches also present the risk that funds could be repatriated by the foreign headquarters of the bank in the case of a financial crisis. This could potentially leave U.K. branch customers out of luck and out of money.
Subsidiaries, on the other hand, must establish and maintain their own capital in an amount that would allow them to absorb the risks of financial crises. This is much more expensive for banks, but it would also stop them from being able to shift their money elsewhere and abandon the U.K., leaving British customers out of pocket. Subsidiaries, in essence, create a U.K. company for the bank.
Excessive Cost to Create Subsidiaries
Despite the added protection provided to U.K. consumers by forcing E.U. banks to establish subsidiaries instead of using branches, the cost would be phenomenal. A bank such as Deutsche Bank, which currently employs 9,000 people in the United Kingdom through its branches, would face a cost in the billions of pounds to try to establish a subsidiary. The risk would be the complete withdrawal of those E.U. banks.
At the moment, banks based in any of the E.U. member states are allowed to sell their services within any other E.U. member state.
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