Prudential Regulation Authority Rulebook

6.1

As discussed in Chapter 2, a branch of an international bank forms part of a legal entity incorporated outside the UK. It follows that its operations are necessarily dependent on those of the legal entity as a whole. PRA authorisation applies to the whole firm. However, the PRA’s approach is to place appropriate reliance on the prudential supervision of the overseas firm by the home state supervisor, subject to appropriate safeguards. For example, the PRA does not apply capital requirements to a firm operating only through a UK branch, and the PRA looks to the home state regime to apply solo capital requirements to the firm.

6.2

While the PRA’s expectations set out in Chapters 3, 4, and 5 of this SS apply to international banks that operate in the UK via branches as well as to subsidiaries, in the case of a branch there are additional expectations which arise since:

• there are potential risks arising in the head office or other branches of the firm which may affect the UK branch operations;
• the PRA authorises the firm as a whole; that is, the entire legal entity and not only the UK branch, and so the firm as a whole must meet threshold conditions; and
• there is a home state supervisory authority which will be responsible for the prudential supervision of the firm as a whole, and with which the PRA will need to agree how each regulator’s respective responsibilities are to be discharged in accordance with their legal duties and, for the PRA, in a proportionate and cost-effective manner.

6.3

The matters that the PRA considers when deciding whether it may be content to authorise a firm to operate in the UK through a branch are summarised in Figure 2 below (which was originally published in SS1/18). This diagram should be read in conjunction with Figure 1, which relates to both firms that are part of groups and firms that have branches.

6.4

In determining whether its threshold conditions are met, the PRA may have regard to the opinion of an overseas regulator, if relevant, taking into account the nature and scope of supervision exercised by it.^[49] The PRA will have appropriate regard to the opinion of the home state supervisor about the firm’s compliance with the PRA’s threshold conditions when forming its own judgement.

6.5

The PRA’s approach to assessing supervisory equivalence for UK branches is the same as for UK subsidiaries of foreign groups (see Chapter 3).

Figure 2: PRA considerations for branch authorisation

6.6

There are additional expectations the PRA has for co-operation concerning branches:

• The PRA will seek to establish a clear acceptance from the home state supervisor of its prudential responsibility for branches in the UK. This will include confirmation from the home state supervisor that the whole firm meets the PRA’s threshold conditions, and requires the existence of a specific agreement with the home state supervisor on the split of responsibilities for prudential supervision of branches from that jurisdiction. The latter typically covers the performance of respective supervisory tasks and responsibilities, the reliance each supervisor may place on the other, co-operation and information sharing, meetings with and information requests to the firm, and how each risk element will be assessed.
• The PRA will expect there to be agreement concerning the information required from the home state supervisor in relation to the firm, which may include information on liquidity; this supplements the whole-firm liquidity information that the PRA expects the firm to provide.^[50] 

6.7

Both would be subject to periodic review to ensure each authority is meeting the other’s expectations.

6.8

Where firms operate in the UK with both a subsidiary and a branch (or one or more of each), the PRA expects appropriate governance to oversee and manage the linkages between the entities.^[51] In supervising these firms, the PRA will delineate its supervision between the entities, and expect the firm to have a clear booking arrangement in place setting out what it will book in each entity and how its application will be verified.

6.9

The assessment of the home state resolution framework for UK branches is the same as for UK subsidiaries of foreign groups (see Chapter 3), but in addition the PRA considers whether depositors of the UK branch will receive fair treatment under the home jurisdiction’s insolvency and resolution regime.

6.10

The PRA will also assess the group resolution strategy and broader resolution arrangements in a similar way to that of UK subsidiaries of foreign groups (see Chapter 4). In particular, the PRA will take into account the Bank’s assessments as to whether the group resolution strategy would deliver orderly resolution in the UK, with reference to the provisions set out in the Bank’s RAF.

6.11

While the PRA, in consultation with the Bank as UK resolution authority, can gain assurance over resolution plans and the stated intentions of the home state supervisor and home resolution authority, doubts may remain over the certainty with which these plans will be applied in practice. The PRA’s starting point is that UK creditors and depositors should be treated equally with their home state equivalents. Where that is not, or may not, be the case, the PRA will consider the impact on its objectives in deciding what action, if any, to take.

6.12

If there is a legally clear form of domestic depositor preference, then this is a known risk that can be assessed.^[52] However, the PRA will also take account of two related risks that are harder to assess:

• the risk of short-notice legislative change in the home jurisdiction during a crisis that is intended to favour domestic depositors or creditors; and
• the risk that, actual administrative discrimination against foreign depositors or creditors takes place during the post-failure liquidation or resolution process.

6.13

The PRA’s preferred approach is to gain assurance that the home resolution authority’s resolution regime will deliver the appropriate outcomes for the PRA’s and the Bank’s objectives as UK resolution authority. In the absence of adequate levels of assurance, the PRA will likely not be prepared to host such a branch from that jurisdiction.^[53] In the case of an international bank operating through an existing branch, it may be required to establish a UK subsidiary. If there is insufficient assurance over the home state resolution arrangements, this may in turn mean that it would be necessary for the firm to be supervised on a more standalone basis consistent with a MPE approach to resolution.

6.14

In general, the PRA will not be content for branches to undertake retail banking activities beyond the levels described in the next paragraph. This ensures that the PRA is able to meet its supervisory objectives and mitigate the risks to UK financial stability.

6.15

In assessing whether the PRA will be content for an international bank to undertake retail activities in the UK through a branch, the PRA will make a determination based on the following:

• the value and type of account: while this is not a hard threshold and may vary on a firm-by-firm basis, the PRA expects branches to have under £100 million of retail and small company^[54] transactional or instant access account balances covered by the Financial Services Compensation Scheme (FSCS);^[55]
• the number of customers: in addition to the value of deposits, the PRA will also take into account the number of customers. Where branches have in aggregate more than 5,000 retail and small company customers with accounts that are used for transactional purposes, this may be of concern, though this may differ on a firm-by-firm basis;
• planned growth: while a branch’s existing retail deposits could be within the PRA’s appetite, the PRA may conclude that the branch’s plans to grow retail deposits are outside its risk appetite.

6.16

The PRA’s approach to authorising and supervising international banks that propose to undertake significant retail banking activities through branches is also driven by the fact that eligible deposits of these branches are covered by the FSCS. In the event of failure, if the FSCS were unable to recoup the amount it paid out via the bank insolvency procedure from recoveries, ultimately there would be a liability to the UK financial system. Given this, the PRA will not, in general, be content for a branch to undertake deposit activity where the total potential liability to the FSCS in relation to covered deposits (as defined in the Depositor Protection Part of the PRA Rulebook) is in excess of £500 million.

6.17

The PRA expects new branches of international banks operating in the UK to focus primarily on wholesale banking activities.

6.18

Where the PRA requires an international bank to use a subsidiary in order to undertake retail banking activities in the UK beyond certain levels, it does not automatically mean that the Bank, as resolution authority, would expect to apply its resolution powers on the subsidiary in the event of failure. This reflects the fact that it may be consistent with the PRA’s objectives to gain greater supervisory influence over a firm, even if the test for use of stabilisation tools is different. The actual approach taken to resolve a firm will depend on the circumstances at the time of its failure.

6.19

Given the cross-border nature of many wholesale banking activities, wholesale branches tend to involve greater complexity in terms of structures, business models, and booking arrangements. Accordingly, where they may become of systemic importance, the PRA has additional expectations.

6.20

The PRA will identify wholesale branches as systemically important when their size, complexity, and interconnectedness indicate that the failure of the firm could have significant consequences for financial stability in the UK. The PRA will inform the firm in cases where its wholesale branch is determined to be systemically important.

6.21

As its starting point, the PRA will have regard to the size of a firm’s UK footprint in deciding whether to determine that a wholesale branch is systemically important, specifically whether it exceeds an average of £15 billion total gross assets. In calculating this figure, the PRA will take account both of assets booked onto the balance sheet of the branch, and assets traded or originated in the UK but booked remotely to another jurisdiction. The PRA will use the data provided in the Branch Return to assist in determining whether the wholesale branch is systemically important.^[56]

6.22

Where a group maintains more than one UK branch, the PRA will aggregate the UK footprint of those branches to assess the overall significance of the UK branches of the group. Where a group also maintains a UK branch of an investment firm, the PRA may also take into account the assets of that branch.

6.23

The PRA’s assessment will also take account of the likelihood that a firm will exceed the threshold in future.

6.24

The £15 billion threshold is only indicative. In determining systemic importance, the PRA will also focus on the overall complexity and interconnectedness of the business undertaken in the branch, including where a branch provides significant operational services or is otherwise interconnected to a systemically important UK bank. It will also take account of the level of provision of critical functions the branch undertakes.

6.25

Box 3 sets out the PRA’s expectations of systemic wholesale branches.

Box 3: The PRA’s expectations of systemic wholesale branches