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.
2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  2  I see four main risks: 1. longevity risk - the risk that annuities to pensioners need to be paid for longer and therefore at a higher cost to the insurer because people live longer than expected; 2. market risk - the risk that asset returns are insufficient to pay the pensions: for example, because the insurer holds assets of shorter maturity than its liabilities, market interest rates fall and the insurer cannot afford to buy sufficient bonds to produce the income needed to meet its annuity obligations to pensioners; 3. credit default and downgrade risk - the insurer suffers losses because the assets in which it has invested default or downgrade; and, perhaps most importantly 4. management and governance risk - in the absence of regulation the owners and managers of an insurer may be incentivised to maximise their own short-term returns rather than managing the business in the long-term interest of the annuity holders. The interests of owners and managers are not necessarily aligned with those of the policyholders because owners share the benefits of taking more risk in a good outcome but have limited exposure to losses in a bad outcome because of their limited liability. Policyholders might be unable to monitor how an insurer is run because of the long-term and complex nature of pensions business.