Regulation Of Bank Branches In The UK And The US
Sea of ChangeRegulatory reforms – charting a new courseRegulation of non-EEA bank branches in the UKSummary comparison of UK and US approaches to branch regulationDecember 2012
Sea of ChangeRegulatory reforms – charting a new courseRegulation of non-EEA bank branches in the UKThe FSA’s proposed action against branches of US and other non-EEA banks highlightsdifferences of approach to regulation of bank branches.In general, the UK regime has been favourable to non-EEA banks allowed to have UK branches: in particular because they have been subject to fewrestrictions on their activities and no branch capital or, in many cases, liquidity requirements.However, the FSA now proposes to ban banks from countries with “national depositor preference regimes” from accepting any deposits unless they canmake alternative arrangements to protect depositors with their UK branches (Addressing the implications of non-EEA national depositor preferenceregimes, CP12/23, September 2012).The US has a different approach to protecting depositors with US branches of foreign banks.The US restricts the deposit-taking activities of US branches of foreign banks to wholesale deposit-taking.The US generally requires foreign branches to hold a capital equivalency deposit of 1% of liabilities (or 2m if greater), and has powers to impose specificasset maintenance requirements on the branch.US branches of foreign banks are subject to the special insolvency and receivership applicable to US banks and assets recovered are used to satisfy thecreditors of the branch before being turned over to the home state liquidator/receiver.The UK has begun to move towards this approach but could go further instead of imposingan outright ban on deposit-taking by foreign banks subject to national depositor preference.The UK proposes to introduce depositor preference for insured depositors with UK branches of foreign banks.The proposed EU recovery and resolution directive will give the UK authorities powers to ring-fence local assets for the benefit of UK branch creditors if theEU authorities decide that they cannot recognise home state resolution actions.However, any move to allow ring-fencing will need careful consideration (e.g. to address issues relating to multi-branch netting of derivatives) and theimposition of local liquidity requirements (e.g. those recently proposed in the US) will remain an issue for foreign banks as overlapping rules mayunnecessarily trap liquidity and result in duplicative requirements.This document summarises aspects of the regulatory regimes for bank branches in the UK and the US. It is not intended to be comprehensive or to provide legal advice. Regulators maybe able to waive requirements or impose additional requirements in individual cases. For more information, speak to your Clifford Chance contact or one of the lawyers named below.Regulation of non-EEA bank branches in the UKClifford Chance2
Sea of ChangeRegulatory reforms – charting a new courseRegulation of bank branches in the UK and the USUKUSCommentWho is relevant localregulator?Currently, Financial Services Authority(FSA). In future, Prudential RegulatoryAuthority (PRA) and Financial ConductAuthority (FCA)Federal Reserve (Fed) and New YorkDepartment of Financial Services (DFS).For UK, assumes the establishment of aUK branch of a non-EEA bank. For US,assumes the establishment of a New Yorkstate licensed branch of a non-US bank.Is there any explicit legalrequirement that the bank issubject to equivalentregulation in its home state?No but the foreign bank must meet thethreshold conditions for authorisation (andsee below in relation to whole firm liquiditymodifications).Fed may not approve a branch applicationunless it finds that the foreign bank issubject to comprehensive consolidatedsupervision by its home countrysupervisor and has furnished allinformation that Fed requires to assessthe application. But it may, in itsdiscretion, approve the application if itfinds that the home country supervisor isactively working to establish sucharrangements and all other factors areconsistent with approval.Under the EU Banking ConsolidationDirective, EU Member States must notapply to branches of non-EEA banksprovisions "which result in morefavourable treatment" than that accordedto branches of EEA banks.Is there a requirement forany initial non-risk weightedbranch capital (dotationcapital)?No.Yes. Branches must generally maintain a"capital equivalency deposit" with adepository bank of assets pledged to theDFS in an amount equal to the greater of1% of the branch's average liabilities forthe previous month or US 2m.Is there an ongoing riskbased or similar capitalrequirement for the branch?No. However, it is a threshold conditionthat the authorised firm as a whole asadequate resources.No (other than as stated above).Regulation of non-EEA bank branches in the UKCertain non-US banks were not subject toreview under the mentioned standards astheir branches were established beforethe enactment of the Foreign BankSupervision Enhancement Act of 1991.Clifford Chance3
Sea of ChangeRegulatory reforms – charting a new courseUKUSCommentIs there an ongoing liquidityrequirement for the branch?Yes. Branches are subject to UK liquidityrequirements, including a self sufficiencyrequirement. However, banks that aresubject to a broadly equivalent home stateregime may be able to obtain a whole firmliquidity modification permitting it to rely onthe whole firm's liquidity resources.No. But the Dodd-Frank Act authorisesthe Fed to impose liquidity requirementson systemically important bankingorganisations operating in the US and inDecember 2012 the Fed proposed rulesimposing liquidity requirements on USbranches of a non-US bankingorganization with combined US assets ofUS 50 billion or more.The Fed’s recent proposals would onlyrequire the US branch to maintain the first14 days of its 30-day liquidity bufferagainst stressed cash flow needs n theUS (the balance could be met at theconsolidated level).Are there any otherrequirements for the branchto maintain a particular levelof assets relative to thebranch's liabilities (assetmaintenance requirement)?No.The DFS can require a branch of a foreignbank to maintain a certain amount ofeligible assets. Currently, the amount isset at zero but the DFS may impose anasset maintenance requirement on acase-by-case basis.Do central bank reserverequirements apply?Yes. Cash ratio deposits with Bank ofEngland.Yes. Reserve requirements with the Fed.Are there any restrictions ondeposit-taking activities ofthe branch?Generally no. But FSA could imposeconditions on the bank's deposit-takingpermissions e.g. restricting the ability toaccept retail deposits.Generally, US branches of foreign bankscannot take retail deposits (deposits withinitial amount of less than 250,000) oroffer US federal deposit insurance todepositors (however, there are somegrandfathered branches).Regulation of non-EEA bank branches in the UKForeign banks in the UK are generallyunlikely to be affected by theimplementation of the Vickers report,because the recommendations are only toapply to banks with more than 25bn ofmandated deposits. It is unclear how therecommendations of the EU Liikanenreport will affect non-EEA banks with EUbranches, in particular if the branch takesinsured deposits.Clifford Chance4
Sea of ChangeRegulatory reforms – charting a new courseUKUSCommentAre there any otherrestrictions on the type ofactivities the branch canconduct?No (but is required to obtain FSApermission to conduct other regulatedactivities and those permissions may besubject to conditions e.g. as regardsdealings with retail clients).Yes. Branch is subject to the sameactivities restrictions as a New York bank,including the restrictions on underwritingsecurities. It is also required to "push-out"otherwise permissible securities brokerdealer and swaps activities.See above.Can the head office or otherforeign branches rely on theauthorisation to conductcross-border business?Yes. The licence is granted to the bank.Yes. The licence is granted to the bank.Are there prudentialrequirements that apply tothe home state or otherforeign operations of thebank?Limited requirements apply to the bank asa whole.The bank as a whole will be treated as abank holding company and subject torestrictions on its non-banking activitiesand to the Volcker rule (subject to somereliefs).Are the branch's depositsinsured under the localdeposit guarantee scheme?Yes. Covers retail and SME deposits up to 85,000.Generally, no.What are the applicableinsolvency or resolutionregimes?Currently, the only applicable insolvencyregime is winding up by the court.US branches of foreign banks are subjectto the special insolvency and resolutionregime to which US banks are subject(distinct from general corporate insolvencyproceedings).The proposed EU recovery and resolutiondirective would give EU authorities powersto recognise home state special resolutionproceedings or to use special resolutionmeasures in respect of the branch.The US assets of the bank would beapplied to meet the claims of creditors ofthe US branch before being turned overthe liquidator or receiver in the home stateinsolvency proceeding.The proposed directive would give theauthorities powers to ring-fence thebranch’s business for the benefit of localdepositors or other creditors if they did notrecognise home state resolution actions.The Banking Act special resolution regimedoes not apply to a non-EEA bank.What are the rules ondistribution of assets ininsolvency?In principle, the assets recovered in theUK winding up are available to bedistributed to the bank's worldwidecreditors, including the creditors of thebranch (recent proposals would give UKinsured depositors a liquidation priority).Regulation of non-EEA bank branches in the UKClifford Chance5
Sea of ChangeRegulatory reforms – charting a new courseContactsChris BatesPartnerCaroline DawsonSenior AssociateCaroline MeinertzSenior AssociateT: 44 20 7006 1041E: chris.bates@cliffordchance.comT: 44 20 7006 4355E: caroline.dawson@cliffordchance.comT: 44 20 7006 4253E: caroline.meinert z@cliffordchance.comNick O'NeillPartner ExpatriateThomas PaxPartnerDermot TuringPartnerT: 1 212878 3119E: nick.o’neill@cliffordchance.comT: 1 202912 5168E: thomas.pax@cliffordchance.comT: 44 20 7006 1630E: dermot.turing@cliffordchance.comRegulation of non-EEA bank branches in the UKClifford Chance6
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differences of approach to regulation of bank branches. In general, the UK regime has been favourable to non-EEA banks allowed to have UK branches: in particular because they have been subject to few
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