ECB backs EU plan to end "blind spots" over foreign banks

© Reuters. FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt, Germany, January 23, 2020. REUTERS/Ralph Orlowski//File Photo

By Francesco Canepa and Huw Jones

FRANKFURT/LONDON (Reuters) -The European Central bank backed on Thursday European Union proposals to toughen scrutiny of foreign lenders in the bloc, which has become a thorny issue since Brexit.

Lenders from the United States, Switzerland and Britain, now outside the EU, fear the proposals will force them to set up a costly branch or subsidiary in the bloc if they want to keep providing some wholesale services to EU customers.[L8N2UY4OJ]

The EU's executive European Commission said its proposals are aimed at clarifying when foreign banks should set up a base in the bloc for core banking services such as deposit accounts.

The ECB said the scope of what constitute core banking services needed further detailing by setting out a clear list.

Currently, national regulators in the EU have wiggle room on when a foreign bank should set up a branch, and the commission wants a more harmonised approach.

Data on such cross-border activity is hard to come by given the patchwork of rules and the ECB, which regulates big lenders in the bloc, said it was important to establish a comprehensive view.

"These regulatory differences create an unlevel playing field and prevent the ECB from having a clear overview of the activities of third-country banks in the EU," ECB supervisor Frank Elderson said in a blog.

"The Commission proposes to address these differences, strengthening the single market and minimising supervisory blind spots, thus rendering supervision more effective," Elderson said.

The ECB said that reporting requirements on a foreign bank's head office should be extended to cover services provided to EU customers to increase transparency for regulators.

The EU proposals also set out when an existing foreign bank branch should become a subsidiary, a more costly undertaking. The ECB said this should not be an 'automatic' procedure but based on an assessment by supervisors once a size threshold is reached.

But assets held at the branch along with those booked elsewhere should be part of the size threshold, the ECB said.

The European Parliament and EU states have the final say on the EU proposals with deliberations ongoing.