Monday, January 12, 2009

Setting up bank branches in the West just got harder

Up until the latest economic crisis in Kenya engendered by the events of January yesteryear, several banks were thinking of having small operations in the UK or in the US to tap into the diaspora. In theory, I didn’t think this was necessary. I for example never needed to go to Kenya to open my online bank account with Equity. However, KCB had for example explored this seriously and Equity is apparently thinking of doing so in Baltimore (?).

Time for a re-think...

From October, any UK-based has to in effect be self-sufficient in terms of liquidity. Other nations will also follow suit. What does this mean? In addition to the fairly onerous capital commitment, banks operating in all G10 and other signatories to Basel 2 will in effect have to demonstrate that in normal and stressed situations, their operations can withstand any cash flow requirements either to hand or from funding that is easily accessible. Sounds simple but one thing the regulators don’t want to hear is that especially in periods of stress, your operations will be dependant on parent bank to provide liquidity. The credit crunch has demonstrated that this doesn’t happen (Iceland banks, Lehman Brothers all swiped cash into home territory as soon things went pear-shaped).

You in effect need to demonstrate that this will be a stand alone banking business...


oym said...

I think, world economic must be changed as soon as possible.

coldtusker said...

I believe a bank charter in the USA would mean the bank is insulated from the parent e.g. Barclays Kenya is 'strong' & not really affected by the parent's woes.

I may be mistaken but a mere branch of a foreign bank may not be able to tap into deposits in the UK & USA.

What sort of operation was Equity or KCB mulling?

MainaT said...

CT-That is exactly it. However, most banks with foreign branches tend to prefer managing liquidity centrally and this what regulators are against.
I believe both were hoping to tap up NRKs... India's ICICI has opened branches in London to hoover up NRIs cash.

coldtusker said...

BUT... so what?

If branches of foreign banks cannot take deposits... it does not affect the USA/UK (much) if there is trouble at home.

Does ICICI have a local charter (under the FSA) in the UK?

Or are they simply a marketing branch for the parent - in which cash Basel 2 does not apply?

MainaT said...

Lets take a step back. Equity would want to open a branch in US/UK so that NRKs could open accounts to put deeposits. What most banks then do is to pus these deposits to parent bank and us the same to lend back home. The UK/US regulators will now in effect that it can only do so if the branch is operational on a standalone basis.

Say Equity has branch in UK. And there would be no pt in setting up a branch if it wasn't for deposit taking or lending purposes (otherwise you set up a representative office). If Equity in Kenya developed liquidity/capital issues, the natural thing to do would be get all the cash it can get and use that to help it in Kenya. Basel2 is now saying that the FSA has the right to seek a guarantee that this cash repariation won't happen.

I'll be blog fully on the new liquidity risk approach soonish

MainaT said...

ICICI has 5 branches so its fully regulated.
Btw, Iceland banks and Lehman Brothers all did this cash reparation leaving counterparties/depositors in the UK in the deep end