Addressing the British Bankers’ Association annual conference last week, FSA chairman Lord Adair Turner put forward the proposal as an alternative to the current system where the responsibility for rescuing the entire international operation falls on the country of origin.
According to Turner, measures of total bank liabilities as a percentage of home country gross domestic product can gloss over a distinction between whether a bank’s overseas branches have significant liabilities or whether their foreign operations are fully capitalised subsidiaries.
He said: “One possible way forward is that across the world we will see an increasing focus on local legal entities, making large global banks essentially holding companies of standalone national banks and perhaps making an overt agreement that in the condition of failure there is no one country responsible for rescue but rather different nations responsible for rescue of the specific legal entities.
“Such a system would mean that large cross-border banks would have to hold even more capital than a capital surcharge regime would require from a too-big-to-fail but purely national bank. But if there are additional systemic risks arising from their cross-border operation, that may be appropriate.”
Turner explained that many in the banking industry are concerned that such ringfencing would drive de-globalisation, reducing the ease with which global capital flows.
“If that were the case, it would be a clear disadvantage but I suspect this is an issue where it may be important to distinguish cost to individual banks from costs to the overall macroeconomy.”
Beachcroft Regulatory Consulting managing director Richard Hobbs says cross-border bank branches are unlikely to survive the current crisis and will be replaced by bank subsidiaries in foreign countries.
He feels the crisis has shown that branches, rather than subsidiaries, can expose nations to difficulty.
Hobbs says customers of UK branches of foreign banks tend to assume they have the same protection as those of UK-based banks.
He adds: “It is difficult to see how that risk can be cleared without saying subsidiaries of foreign banks are OK, but not branches. It is hard to see the branch system surviving this event. That is true of insurers as well as banks.”
Bill Warren Compliance managing director Bill Warren says he is not convinced Turner’s approach is practical or one that home states would “find comforting”.
He says: “A lot of the home states across the EU would like to maintain the status quo as they are currently feeding off other countries.
“These measures would make it more difficult for banks to trade cross-border, which is totally against the European Commission approach of opening up trade.”
Mortgage brokers say there is a danger that increasing capital requirements for globally systemic banks beyond that of nationally systemic banks could hinder their competitiveness, with a knock-on effect for the mortgage market.
John Charcol senior technical manager Ray Boulger says: “Anything that requires banks to have more capital is unhelpful as there is a shortage of funding available now for mortgages and that is partly down to the lack of capital.”
First Action Finance head of communications Jonathan Cornell says: “It would affect the likes of Barclays, Royal Bank of Scotland and HSBC. Anything that ties up more of banks’ capital is not going to help the mortgage market but it is important for global regulators to find a way of dealing with banks that just grew so large and complex that they outgrew regulators.”
Cornell points out that many of the multinational banks have been able to recapitalise themselves without state aid because of their global diversity.
He says: “Santander and HSBC are well capitalised and Barclays has done a solid job of recapitalising itself without relying on taxpayers. It is a fine dividing line between making sure our banks are properly regulated and creating an environment where it is difficult for banks to thrive.”
Boulger also argues that separating global banks into local entities may not be practical because of the number of international trades and transactions that take place.
He says: “I wonder how viable it would be to actually police that sort of arrangement. I am not convinced of how easy it would be to put each country’s transactions in a box.”
Speaking at the BBA conference, Lord Turner also called for further debate on the ramifications of separ-ating banks’ retail and wholesale functions.
He said: “There could be a role for defining more clearly the separate legal entities in which core retail banking functions and investment-banking-type functions are performed.”
He noted that under such a system, it might be possible for the Government to rescue a bank’s retail arm but leave its investment arm to fail in the event of a crisis.
Cicero Consulting director and chief corporate counsel Iain Anderson says: “I think any moves to create separate retail and wholesale banks will seriously disadvantage the UK as continental competitors are highly unlikely to follow suit.”