By Douwe Miedema, Soyoung Kim and Steve Slater
WASHINGTON/LONDON (Reuters) - The British units of foreign banks could be required by UK 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 U.S. Federal Reserve.
The UK's Prudential (LONDON:PRU) Regulation Authority (PRA) has recently started asking foreign banks to submit data, the sources said, a possible first step toward 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 U.S. 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 PRA'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 PRA 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 U.S. central bank during the crisis.
The U.S. units of foreign banks have often fared poorly in stress tests run by the Federal Reserve. This year, the U.S. units of Deutsche Bank (DE:DBKGn) and Spain's Banco Santander (MC:SAN) were the only two banks out of 31 to fail the test.
The PRA 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 UK banks and building societies that were stress-tested last year will be examined in 2015.
All eight institutions passed last year's healthcheck, though Lloyds Banking Group (L:LLOY) and Royal Bank of Scotland (L:RBS) only narrowly exceeded minimum standards for withstanding a severe UK 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.
The PRA has warned its stress tests could get tougher and this year may focus more on risks from overseas markets.
The PRA's consultation study could lead to proposals to increase the number of banks in the test from 2016 and beyond, including UK units of U.S. and other overseas banks as well as more smaller UK banks, the sources said, asking not to be named because they were not authorized to speak with the media.
A senior U.S. bank official said a key question for the U.S banks would be whether the UK would accept the same data and risk models that are submitted for the Fed's stress tests, or whether Britain would require that they compile another set of data. The Federal Reserve declined to comment.
Politicians abroad have criticized the U.S Federal Reserve for tightening its grip on foreign banks, saying the added U.S. oversight is not necessary because European parent companies have significantly improved their capital positions.
The Fed is requiring them to hold as much capital locally as their domestic rivals, and the number of foreign banks in the stress tests is growing. It says the extra requirements are necessary because foreign banks' activities have expanded significantly and could affect U.S. financial stability.
The U.S. units of Barclays (L:BARC), Credit Suisse (VX:CSGN) and UBS (S:UBSN) are among several expected to join the Fed examination in coming years.
The Fed's stress tests are among its most important tools to test the resilience of large banks, which critics say are "too big to manage."