Bank of England to let EU banks stay and play in City under EU rules

What’s this, an outbreak of Brexit common sense?

The Bank of England has announced consultations on allowing European banks and insurers in the City to carry on as normal after the UK's departure, regardless of the outcome of the forthcoming trade talks between the two sides.

It’s a unilateral gesture, with Cabinet support, that will potentially save them millions of pounds because they won’t be required to set up new UK regulated subsidiaries in this country to conduct wholesale financial business. So, quite the early Christmas present.

The offer apparently holds good even if the UK crashes out, and that is still a distinct possibility given how much influence low rent Tory Brextremists, including several ministers, still have.

Coming after the EU’s chief negotiator Michel Barnier struck a hardline tone by warning that there would be no special deals for the City of London, it looks like a rare instance of the UK behaving like the grown up.

Well, up to a point. But first let’s look at what this means.

A subsidiary has to follow the capital rules and accept the prudential financial oversight of the country in which it operates (so the Bank of England here). A branch, however, does not. Its financial health is overseen by its “home” regulator (it should be stressed here that conduct is different, and is policed by the Financial Conduct Authority in both cases).

After the financial crisis pressure was put on banks using branches (Barclays for example) to replace them with subsidiaries (as with, say, HSBC).

That’s because a branch based structure makes it much easier for troubled banks to sweep up all their capital and take it home if they get into trouble, leaving the branch in the lurch. Less of a worry if they are sensibly regulated, which the Bank clearly feels that the Europeans operating here are.

Taking this step might in theory encourage them to keep functions here, along with some of the high earners that staff them, who happen to pay a lot of tax.

It amounts to the UK accepting banks in London operating under EU capital rules, a privilege that it doesn’t look as if the EU will be granting to UK banks. But with the aim being to limit the damage to the City, which has already endured a kick in the guts from Brexit, and protecting some of its tax revenues, it is the pragmatic approach.

It is worth noting the tone of the language used by the Bank in its announcement. It is couched in terms of co-operation, and co-ordination, and the securing of good mutual working relationships with EU watchdogs post Brexit.

The contrast with the way Britain's juvenile politicians have been carrying on could hardly be more stark. Brexit is a grotesque act of folly, but if it was being handled by British regulators you do rather get the impression that it could be accomplished with only limited damage.

How well the Bank's policy will work in practice, particularly as regards saving the City, is open to question. But after the great leaps backwards this country has been taking, it is a baby step in the right direction. Perhaps Christmas fairy tales do come true.