Your World of Legal Intelligence
 United Kingdom | +44 (0) 20 7284 8080

Chapter INTM267702

Document Cited in Related
Vincent
Published date09 April 2016
Record NumberINTM267702
CourtHM Revenue & Customs

Banks aim to maximise their profits by conducting the maximum amount of lending and dealing business that is possible without infringing the capital adequacy requirement (see INTM267701) they have been set. This means that they cannot borrow every pound they use in their business; they must have a certain amount of regulatory capital. Part of that amount, which will be at least equal to and normally in excess of the minimum amount of equity capital required by the regulator, is ‘free’ to the bank, since the bank is not paying interest to borrow it. The bank’s profit on this proportion of its capital will be much higher than its usual margin between the return on lending and its costs of borrowing. Therefore, the amount of the bank’s regulatory capital, particularly equity capital, has a direct effect on the profits it makes.

The position for a UK permanent establishment (PE) of a foreign bank until 31 December 2002 was, however, very different from that described above. While a foreign bank with a PE in the UK will itself be regulated in its home country, there is no PRA requirement for the PE to be regulated in the same way as an UK bank. This means that, if it chooses to do so, a PE in the UK, unlike a bank in the UK, is free to borrow the whole of the funds used in its business, without restriction. Thus, the absence of any regulatory requirement for free capital can result in higher funding costs overall and in lower profitability for a PE. It is quite possible for a foreign bank that is profitable overall to make a substantial loss in its UK PE, even...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT