PRA proposed (in CP2/21) an approach to supervising the UK activities of PRA-authorized banks and designated investment firms that are either headquartered outside the UK or are part of a group based outside the UK. CP2/21 refers to such firms as “international banks.” PRA also proposed expectations for receiving information about risks in the wider group and for co-operation from regulated entities and their supervisors with intention to ensure that firms are meeting threshold conditions. The implementation date for the final policy is proposed to be in the second quarter of 2021 and the feedback period on the consultation ends on April 11, 2021. David Bailey of BoE, in his speech on the PRA approach to supervising international banks, highlighted that the regulator is open to international banks operating in the UK, but they will face the same robust regulation as the other financial service firms in the jurisdiction.
CP2/21 proposed the arrangements that PRA would expect to be in place to be able to effectively supervise international banks. The proposals would result in a new supervisory statement on approach to branch and subsidiary supervision of international banks (Appendix of CP2/21), which will supersede SS1/18 on the approach to branch authorization and supervision of international banks. The proposed expectations on subsidiaries and systemic wholesale branches in the proposed supervisory statement are consistent with the existing supervisory approach of PRA and are intended to provide clarity to firms on what they need to do to meet the PRA threshold conditions. CP2/21 proposed that certain factors would be relevant when considering an international bank’s compliance with threshold conditions, taking into account its membership of a group, its potential impact on UK financial stability, and the degree of integration between operations inside and outside the UK.
The expectations of PRA for the information that it requires to effectively supervise a firm vary according to the way in which such a firm’s affairs are integrated or separated from the rest of the group. Consequently, the proposed supervisory statement describes the expectations of PRA for the appropriate degree of separation and controls around the firm’s governance and independent risk management in different circumstances. Although the proposed supervisory statement largely consolidates the existing approach to international banks, PRA recognizes that firms operating with deemed authorizations under the temporary permissions regime may need additional time to adjust. Accordingly, it is proposed that such firms will not need to meet the expectations in the proposed supervisory statement immediately, but will need to do so as soon as practicable and in any event by the time they are authorized by PRA and exit the temporary permissions regime. As part of pre-authorization discussions, PRA proposed that such firms demonstrate how they intend to meet these expectations.
These proposals aim to provide clarity to international banks on the implications, for them, of the different ways they may choose to structure their operations. The proposals also aim to explain how PRA would assess such firms against its threshold conditions, particularly the condition related to the effective supervision of firms when a firm belongs to a group based outside the UK. Overall, the approach of PRA to the supervision of international banks remains stable and consistent following the withdrawal of UK from EU. The proposals have been designed in the context of the UK having left EU and the transition period having come to an end. Unless otherwise stated, any references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework.
Comment Due Date: April 11, 2021
Keywords: Europe, UK, Banking, CP2/21, Governance, Proportionality, Systemic Risk, Threshold Conditions, Foreign Banks, PRA
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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