March, 29, 2010

The European Union should rethink its rules for cross-border banking to require banks to operate subsidiaries rather than branches in other EU countries as part of efforts to prevent a repeat of the financial crisis, according to the Commons Treasury committee.In a report released on Monday on institutions that are “too important to fail” it said that “radical reform” would be necessary, including tighter capital requirements, restrictions on total borrowing and as well as structural reforms that would make it easier to wind up a failing bank.

The committee wrote particularly favourably about “subsidiarisation”, a structure in which global banks are required to open separate legal entities and meet local requirements for capital and liquidity in each country where they operate. Currently, EU banks can simply expand across the 27-country bloc through branches, which are less tightly regulated.“We believe that the financial system should contain what the governor of the Bank of England described as ‘firebreaks and firewalls’, to lessen the impact of crisis when it inevitably occurs,” the committee report said.

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