Some of India's largest banks are now being forced to provide hundreds of millions of pounds to capitalise new UK subsidiaries that the Bank of England had asked to set up to house their consumer-facing activities. With the recent tightening of regulations for foreign banks offering retail services to UK consumers, as many as 50 overseas lenders with branches in the country might face similar obligations. The change shows growing concerns at the BoE's Prudential Regulation Authority of UK depositors losing out if a foreign lender collapsed and its home regulator prioritised domestic depositors.
According to Financial Times, State Bank of India, India's largest lender by assets, and Bank of Baroda are among those being forced to comply with the BoE mandate. As the regulator goes through a 50-strong list of banks based outside the European Economic Area that have permission to offer retail banking services through lightly regulated branches, more banks are set to follow. Banks from Asia, the Middle East, Africa and the Americas, face a tough decision of either exiting the market or creating a heavily regulated subsidiary.
“In some ways it is unfortunate,” said Sanjiv Chadha, UK head of State Bank of India, about the regulatory request. “But it is an incremental cost that we will absorb and we will move on. While we could have done without it, we don’t see it as discriminatory.” Chadha said the extra burden on its retail operation, including setting up an independent board for the new subsidiary, would make it harder to grow as fast as its larger wholesale banking operations in the UK. State Bank of India is adding about $300m to capitalise a new subsidiary that it plans to set up by 2017 to house its UK retail banking operation, which has 10 branches and about $2.5bn of customer deposits.
In deciding which foreign banks must comply with tougher rules, the BoE is weighing both the size of their retail operations in the UK and the strength of their home country’s “resolution” regime for dealing with a banking collapse. The UK rules partly stem from the bitter experience of the 2008 financial crisis, when Britain had to compensate depositors who lost money they had stowed in branches of Icelandic banks that collapsed.
Banks based in the European Economic Area are free to open operations in other members of the bloc without needing to set up a full subsidiary. The BoE is less worried about wholesale banking operations being carried out by non-EEA banks in the UK via branches. Two Chinese banks; Industrial and Commercial Bank of China and China Construction Bank, have been allowed to opn their branches this year, in addition to their existing subsidiaries.
