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Banking: Is a subsidiary safer than a branch?

The entire premise of the regulatory push for subsidiarization is that bank subsidiaries are safer and more stable in a crisis.

One of the strategy’s most enthusiastic advocates is Lord Adair Turner, the former chairman of the Financial Services Authority who was responsible for crafting much of the UK regulatory response to the crisis. Speaking at a roundtable in the City of London in early February he argued forcefully for fragmentation of banking and the stability he believes would result.

"There are some forms of capital flow that are valuable and some are not," he told the gathering. "Short-term capital flows are often driven by carry trades that can be deeply unstabilizing and, as we know, capital controls don’t work. This can be constrained by requiring subsidiarization rather than branch networks. Flows of funds are less volatile. Where there are operating subsidiaries in times of stress, they don’t cut their lines while branches cut their lines," he stated.

Lord Adair Turner, former chairman of the FSA

It is this concern – bank behaviour in resolution – that is the primary driver behind subsidiarization. "We would hope for a system allowing for a series of downpayments that encourage home and host to work together," says Brad Gans, chief legal counsel in EMEA at Citi.

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