UK says its local banking rules eased for all, not just Chinese

By Huw Jones and Steve Slater

LONDON (Reuters) - Britain is ready to relax its banking rules for any non-European bank, not just those from China who want to set up investment banking operations in London, its chief industry regulator said on Thursday.

Earlier this week Chancellor George Osborne had said the Bank of England's Prudential Regulation Authority (PRA) will holds talks with Chinese banks to allow them to set up wholesale banking branches in London, easing regulations imposed after the financial crisis.

But Andrew Bailey, head of the PRA said on Thursday that the new regime applied generally to banks from outside Europe, allowing them to open branches in London rather than more tightly supervised, ring-fenced subsidiaries, as long as they show that the bank can be wound up if it hits trouble.

It marks a significant shift in policy, aimed at promoting free trade, and reverses the fragmentation of supervision seen since the financial crisis.

"Earlier this week it was announced that the PRA will be prepared to see Chinese banks open branches here ... it should be clear that this is not a special arrangement for China, rather it is part of a broader policy," Bailey told a British Bankers' Association conference on Thursday.

Bailey said branches would only be allowed if the PRA had clear and credible assurances from the parents of banks and from their home regulator.

"This is not a free for all," he said.

"Our stance is sensibly cautious, but not I think restrictive ... And let me reiterate that it is a general policy, not a China policy, and it is consistent with promoting the benefits of an open world economy."

In the last five years Britain has required most overseas banks to set up their UK operations as subsidiaries rather than branches, thereby providing greater protection for depositors and taxpayers. Branches are treated as extensions of the overseas bank, leaving the British regulator with limited control over capital and liquidity.

According to media reports Chinese banks have complained the rules made it hard to operate in Britain, prompting them to move much of their business to Luxembourg.

But in announcing an easing of the rules Osborne was met with accusations that he was being softer on Chinese banks, and going against the trend of requiring tougher rules on capital adequacy and against money laundering.

A senior UK lawmaker on Wednesday called on the PRA to show it had not been put under pressure by the government.

Following Thursday's clarification from the PRA several bankers welcomed the shift in policy as a boost for London's financial industry.

"I think it's good," said Jeremy Bennett, chief executive in Europe for Japanese bank Nomura. "We (Nomura) are a typical example of people who choose to base themselves in London because of all the intellectual capital.

"If we don't reach out to the big Asian powers and the big investors it is at our peril."

RESOLUTION PROGRESS

Bailey said progress had been made in how banks would be wound down in an orderly way and ensure customers' money is kept safe, meaning it was reasonable to take steps towards a resumption of the growth of cross-border banking in ways that were discouraged in the past.

Cross-border banking has become divided since the 2007-09 financial crisis as regulators want to avoid having to use taxpayer money to shore up lenders again, prompting some to force foreign banks to hold more capital locally.

The European Union's chief financial services regulator warned earlier on Thursday he could take tit-for-tat action if the United States pushes ahead with plans to impose extra capital requirements on foreign banks.

But Bailey said: "We should not design the world as if fragmentation and balkanisation are inevitably always likely to be with us."

However, he said he did not want banks outside Europe to have significant retail operations in Britain.

The PRA did not wish to see banks outside the European economic area undertaking important retail banking functions, such as taking deposits, beyond minimal levels, unless there was a good reason and a "very high level of assurance" on how a bank would be resolved if it hit trouble, he said.

(Editing by Greg Mahlich)