Britain’s banks, heirs to empire, have long coveted the riches of China. On October 15, 2013 their hopes of reaping them rose greatly when the chancellor of the exchequer, George Osborne, announced a deal with China that is intended to make Britain the main offshore hub for trading in China’s currency and bonds and for foreign institutions investing in China’s fast-growing economy.But there was a price. Mr Osborne conceded that British regulators would “consider” (which tends to mean “approve”) applications from Chinese banks wanting to enter Britain as branches of their parent banks rather than as subsidiaries. The difference may seem arcane but in the world of banking regulation it is hugely important. Branches are overseen by their parents’ bank supervisors at home. They are not required to have thick cushions of capital to absorb losses or large chunks of cash to see them through hard times. Instead they are expected to call on their parents for help if they run into difficulties. This makes branches much cheaper and more attractive for banks than subsidiaries.
It also explains why regulators generally dislike them. The laxer rules on branches leave them more vulnerable if they or their parent banks get into difficulties. In allowing Chinese banks to use branches, British authorities are in effect betting that if anything goes wrong the Chinese government will bail them out, says Simon Gleeson of Clifford Chance, a law firm.
The chancellor’s decision has raised eyebrows in London’s financial district. Some worry that a supposedly independent regulator has been subjected to political interference and has been forced to lower its standards. Yet critics of the deal overlook two important points. The first is that there is an inevitable tension between a bank regulator’s mission of maintaining financial stability and the wider aim of promoting economic growth. Tension between a regulator and elected officials is not just inevitable but healthy.
Just as important is the tricky balance regulators must find between protecting their own banking systems and encouraging the smooth functioning of global capital markets. Letting banks use branches allows capital to flow more easily around the world. Forcing them into subsidiaries can lead to the creation of stagnant pools of cash and capital. Although Britain has cast a more sceptical eye over branches of foreign banks since the crisis—particularly after its taxpayers were left out of pocket by the collapse of Icelandic banks and their British branches—it has generally stood on the side of financial globalisation. In this it is increasingly lonely. American regulators are likely soon to force foreign banks to establish fully-capitalised units. EU officials are threatening to do the same. Given this trend, Britain’s stance looks less like an opportunistic grab for Chinese business and more like a last, probably hopeless, stab at keeping alive the dream of a seamless global financial market.
Chinese banks: Open for business, Economist, Oct. 19, 2013, at 62