Prudential Regulation Authority ("PRA")

supervision of international banks actions

The PRA has published its final policy approach to supervising international banks,
confirming proposals consulted on in February this year.
The PRAs final policy
approach can be found in a Policy Statement (PS8/14) available here and a
Supervisory Statement (SS10/14) available here. In particular, the PRA has clarified
how it will supervise UK branches of non-European Economic Area (EEA) banks.
For these branches, the PRA will focus on assessing the equivalence of the banks
Home State supervision; whether the branch carries out Critical Economic Functions
(CEFs) such a retail banking; and resolvability. Where the PRA has serious
concerns over any of these matters, it may refuse authorization of a new branch or
revoke a branchs existing authorization to operate in the UK, thereby requiring the
non-EEA bank to apply to operate in the UK as a subsidiary.
The PRAs approach to non-EEA branches is reinforced through a new rule, which
took effect from 5 September 2014, requiring non-EEA banks to take all steps within
their control to ensure that their resolution plan provides adequately for the
resolution of the UK branch. There is also a new requirement for a senior individual
in the UK management team of a non-EEA branch to give an annual attestation to
compliance with the Senior Management Arrangements, Systems and Controls
(SYSC) sourcebook of the PRA Handbook. This demonstrates the PRAs desire for
greater accountability among senior managers of non-EEA branches.
In addition, under a proposed rule which is not yet in force, non-EEA branches and
EEA branches will have to submit a Branch Return twice-yearly to provide
information on their UK activities. All firms will need to make a return (on a pilot
basis) by 14th November: a formal rule will then follow.
Advice: Existing branches of non-EEA banks should consider how they will satisfy
PRA that their branch status does not pose a threat to PRA's objectives. They should
also consider the attestation required by March next year and review governance

and their SYSC compliance. Documentation may need to be improved and

operational testing may support the attestation process. Firms should also consider
the individual who will give the attestation and the notion of a branch CEO (who
would qualify for the proposed Senior Management Function).

Europes - Make-or-break point is upon us

Europe is at a make-or-break moment. Two very different events on Sunday,
occurring at opposite ends of the region, will largely determine the entire
Continents direction for years ahead: the parliamentary elections in Ukraine, and
the release of results of bank stress tests and an asset quality review conducted by
the European Central Bank. Before explaining the significance of these two events,
and their unexpected linkage, I need to mention a third announcement, due next
Wednesday: the European Commissions verdict on the budget for 2015 submitted
last week by the French government. Next week, the commission will have to come
up with a Solomonic judgment that somehow reconciles the French governments
determination to stimulate its economy by cutting taxes with the German-imposed
fiscal compact that Nicolas Sarkozy as the president of France rashly accepted in
a moment of desperation in the 2012 euro crisis. This agreement requires France to
raise taxes or drastically cut spending to reduce its budget deficit to 3 percent of
gross domestic product. The fiscal compact rules, if applied literally, would make
economic recovery in France a mathematical impossibility. Yet bending these rules
will provoke a public backlash in Germany, and perhaps even a Constitutional Court
challenge, which could even force Chancellor Angela Merkel to renege on her
commitment to support the rest of the euro zone. Depending on how these three
events turn out, Europe will either be on the road to a moderate economic recovery
next year or it will be condemned to continuing stagnation, possibly leading to the
breakup of the euro zone or even the European Union as a whole. Why are the
stakes suddenly so high? With most of Europe sliding back into recession over the
summer as a result of the war in Ukraine and the failure to implement the kind of
monetary and fiscal stimulus that revived the United States, Japanese and British
economies, Europe now has an obvious choice: stick to failed policies that are
almost certain to perpetuate economic stagnation, or change course. When faced
with this choice, the German guardians of the euros monetary and fiscal rule book
defend the status quo, no matter how dismal. Germanys central bank and
constitutional court are steeped in a tradition in which rules must be obeyed at all
costs and following the letter of the law is more important than observing its spirit
or achieving a desired outcome. But this legalistic philosophy is now running run up
against the even more inexorable laws of mathematics, democracy and geopolitics.
What if it is mathematically impossible for the governments in France and Italy to
abide by European Union budget rules, because raising taxes and cutting public
spending would crush economic activity and thus widen budget deficits instead of
reducing them? What if electorates refuse to accept a decade of austerity and

stagnation simply for the sake of preserving the Unions monetary and fiscal rules?
And what if Ukraines absolute sovereignty and territorial integrity cannot be reestablished without risking an all-out war with Russia, which Western democracies
will not tolerate?
While politicians prefer to dodge these predicaments, the fact is that Europe has
now reached a point where some of its rules will have to be changed or
reinterpreted and some of its principles compromised. The only real question is
whether Europe arrives at the necessary compromises through conscious political
decisions or waits for them to be imposed chaotically by economic and electoral
upheavals. The ECB, unlike the central banks of the United States, Japan and
Britain, has not created money out of thin air and is expected to leave interest rates
at a record low 0.5 percent next week and for the rest of the year. Perhaps its
biggest concerns are the continuing reluctance of banks to lend in the weaker
eurozone members and rising borrowing costs in those countries since the Fed
upset the applecart. That brought to an end a 10-month trend of cheaper borrowing
following the ECB's pledge to buy government bonds in potentially unlimited
amounts to shore up the single currency, although yields remain well short of
danger level. It is not clear what the ECB can do. Bond-buying can only be triggered
if a country requests help from the euro zones rescue fund and there is no sign of
that happening soon. There has been talk of cutting the deposit rate which banks
get for storing their money at the ECB into negative territory to try and boost
lending. But that rate is already at zero and has not prompted banks to help the
wider economy. If deflation loomed, the ECB's mandate would allow it to print
money but again that looks unlikely. Another option would be an offer of cheap,
long-term liquidity to banks similar to the more than 1 trillion Euros handed over
last year but there has been no hint of the ground being prepared for that. The ECB
has emphatically denied a report that it was considering launching a new bond
purchase program under which it would buy debt of all 17 euro zone countries.
Date: 11/06/2014

Mircea Halaciuga, Esq

Secretary General SIPG

Tel. 040.724581078
www.SIPG.ro