14. From Branches to Subsidiaries: Post-brexit Enforcement of Subsidiarisation in the European Union

In light of the principle of passporting in the European Union (EU), a third-country financial institution is allowed to provide services throughout the EU provided that it has obtained authorisation from the competent authority of the EU Member State (MS) in which it applies for its licence. Under this principle, foreign banks with such licenses are increasingly taking advantage of it to provide financial services throughout the EU using branches, which require lower operating costs and that are subject to lighter prudential control. In a recent report, the European Banking Authority (EBA), flagging the above issue, advised introducing a mechanism of subsidiarisation aimed at preventing risk. Likewise, in the current post-Brexit scenario, we are experiencing an increase in the restructuring of banking services, circumventing the consolidated supervision via the use of branches. This chapter aims to address the deficiencies of the current regime through a critical analysis of the recent European Commission’s (EC) proposal, which plans to enable EU National Competent Authorities (NCAs) to “force” foreign banks to turn their larger and riskier branches into subsidiaries.