Foreign banks may be subject to future UK stress tests
Annual health checks would bring British policies into line with those of Federal Reserve
The British units of foreign banks could be required by regulators to submit to annual health exams for the first time, banking and industry sources said, potentially bringing Britain's policies into line with those of the US Federal Reserve.
The Prudential Regulation Authority has recently started asking foreign banks to submit data, the sources said, a possible first step towards making them subject to the stress tests, which assess if banks have enough capital to withstand a hypothetical economic crisis.
One of the sources added that British units of US banks were being asked for more data to give the regulator a better understanding of market risk, but it does not necessarily mean that formal stress tests will be required in the near future.
Asked for comment, a Bank of England spokesman said: "We collect data to help inform our understanding of risk profiles, such as those in trading books of investment banks. But this should in no way imply an intention to include foreign firms in the concurrent stress-testing."
The authority's deliberations underscore efforts by regulators around the world to step up scrutiny of foreign banks operating in their region, to make sure they are strong enough to stand on their own if their parent group experiences trouble.
Action by the authority could create additional headaches for banks, which have to deal with often opaque tests in multiple jurisdictions, while leaving investors with a muddy picture of their health.
Before the 2008 financial crisis, regulators globally largely relied on their peers abroad to oversee foreign banks doing business on their turf. That changed after some foreign banks were forced to tap emergency dollar funding from the US central bank during the crisis.
The US units of foreign banks have often fared poorly in stress tests run by the Federal Reserve. This year, the US units of Deutsche Bank and Spain's Banco Santander were the only two banks of 31 to fail the test.
The Prudential Regulation Authority has said it would launch a consultation paper this year to see how it would proceed with its stress-testing programme beginning in 2016 but declined to give further details. It has said the same eight British banks and building societies that were stress-tested last year will be examined in 2015.
All eight passed last year's health check, though Lloyds Banking Group and Royal Bank of Scotland only just exceeded minimum standards for withstanding a severe recession and slump in house prices. The exam took place alongside a broader test of Europe's top 130 banks by the continent's watchdog.
