Extending the logic of domestication  Retail deposit-taking is a critical economic function and local supervisors have more levers over subsidiaries than branches. Therefore – consistent with the ICB’s logic – we have preferred for several years that international banks from outside the EEA (known as ‘third countries’) with more than £ of retail and SME FSCS-covered 6  transactional or instant access account balances put them in a subsidiary . There are not many of these: most international banks in retail focus on small expatriate or diaspora communities, or on particular niches in private banking. We expect each of these firms to have a viable and sustainable UK business model which accretes a portion of its own capital, rather than being reliant on its parent, with high standards of risk management and governance. 5  See the PRA Annual Report and Accounts; July 2017 and U.S. Department of the Treasury; A Financial System That Creates Economic Opportunities; June 2017. 6 See SS10/14: Supervising international banks: the PRA’s approach to branch supervision; September 2014. 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  EMBARGO: not for release before 19:30 on Wednesday 4 October 2017  These retail subsidiaries are not as insulated as the financial and operational separation required by the ICB. But with a much lower threshold than the £ billion of core deposits at which ring-fencing kicks in, our policy follows the same logic, proportionately applied.
Overseas regulators (as host  2  See The PRA’s approach to the implementation of the systemic risk buffer: Statement of Policy; 5 December 2016. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  EMBARGO: not for release before 19:30 on Wednesday 4 October 2017  authorities) use their own rules to set requirements for the subsidiaries in their territories. They might consider these businesses to be systemic on a local basis. They might measure financial transactions under different accounting rules, apply different prudential approaches to assessing risks, or restrict capital transfer to the UK parent. Therefore, a UK bank’s overseas subsidiary might be required to have an outsize portion of its group’s capital. Back at home, the parent might fund the subsidiary’s higher capital requirement by raising debt externally. This is known as ‘double leverage’ and firms use it because debt is generally cheaper than equity. But servicing double leverage relies on flows of dividend income which are uncertain and at the discretion of local boards and supervisors across the group. Or the parent might be incentivised to under-allocate resources to unregulated but risk-taking entities within the group. We need to be mindful of the risks this can create, and so today we are announcing a new approach, to 3  ensure that UK banking groups are at least as strong as their parts . Subject to our consultation:   We will expect firms to demonstrate to us that they can manage the cash-flow and other risks associated with double leverage.