The end of foreign banks in the UK?


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It could be clamp-down time for foreign banks. The Prudential Regulation Authority (PRA) has warned that overseas non-EU banks that have UK-based branches may be banned from operating in the future. Currently foreign banks do not have to comply with full UK regulatory standards, and can operate more or less as they do on home turf. Is the move needed?

Chilly welcome

Yes. One example of foreign banks with rather less than rigorous internal controls was the Icelandic banks saga. Several Icelandic banks went bust following the 2008 Icesave scandal (four ex Kaupthing bosses got jail sentences), turning Iceland into an international pariah.

Now, the PRA could confiscate operating licences for foreign banks if there is oversight concern. Foreign bank branches will need to give the PRA detailed information allowing Bank of England officials to measure what potential trouble a foreign bank could cause, were it to mess up.

"It is important,that we get the right balance," says the PRA, "between maintaining our place as an open financial market while delivering our statutory objective of promoting safety and soundness in the firms we supervise. This is crucial for the stability of the UK financial system."

China exception?

The changes mean that a foreign bank operating in the UK would likely need to set up a fully fledged UK subsidiary operation, forcing it to comply with City regulations.

The move though appears to fly in the face of noises made by Chancellor George Osborne in October last year. Visiting China, Osborne was keen to to push London's potential as a trading centre for the Chinese renminbi - and to encourage an expansion of Chinese bank branch operations in the UK.

So a difficult balancing act, and the potential for mixed messages. The assets non-EU UK branches control are considerable, estimated to be worth more than £2 trillion. However, EU banking operators are hardly seen as exemplars.

The US government, for example, claimed this week that Credit Suisse helped American clients hide around $10bn from the tax authorities. A Telegraph report says shell companies were set up - and some customer bank statements were allegedly circulated inside the cover of magazines to avoid detection.

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