Co-operation between regulators will be more effective than 'arbitrary' capital requirements on offshore subsidiaries or parents to mitigate 'risky' upstreaming practices, the Isle of Man (IOM) Government says.
Many banking operations in the Crown Dependencies use the practice of upstreaming a large percentage of deposits from customers for treasury management by the parent company.
But the practice has come under scrutiny from the Foot Review, due in September, which is investigating the risks of upstreaming, after the collapse of Kaupthing Singer & Friedlander Isle of Man in October 2009, which some blame on the practice.
In the interim review, Michael Foot said he will probe "the interdependence between the UK and the financial centres," manifest in the "substantial" flows of business from the UK to them and vice versa.
"Defining and understanding the implications of these mutual dependencies and any related contingent liabilities will be a key theme of my Review," he says.
One suggestion to curb upstreaming is to impose a cap on the amount offshore subsidiaries can upstream to their parent company.
However, John Spellman, director of Finance for the Isle of Man, says: "a more sensible way is better cooperation between regulators."
"Arbitrary capital requirements on offshore subsidiaries or parent companies may not reflect the nature of the parent's balance sheet. Co-operation between financial regulators, taking action in common is the key," he says.
Spellman estimates £400bn in liquidity is pumped into the UK from overseas subsidiaries and therefore the UK economy is "highly reliant" on the collection of international deposits. Consequently if a cap were imposed, this would impact on the City too.
Probing the collapse of KSFIOM, a Treasury Select Committee found a Memorandum of Understanding was not used between the FSA and Isle of Man regulator, the Financial Supervision Commission (FSC), and a breakdown of effective communication ensued.
"Significant sums" were upstreamed to sister company KSFUK, as the FSC was concerned about the position of the Icelandic parent.
Yet in May 2008 prior to the bank's failure, the FSA offered no assurances KSFUK would be able to repay the money and in October last year, the FSA placed part of KSFUK into administration, consequently freezing the savings of depositors in KSFIOM.
The Committee said the FSA could not have given KSFIOM advance warning of events including the fact KSFIOM deposits would not be protected by the FSCS. "There was no regulatory requirement to share this information," it added.
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