By Huw Jones

LONDON (Reuters) – Forcing foreign bank branches in the European Union to become subsidiaries would be a “last resort” to shed light on regulatory blind spots, a senior EU official said on Tuesday.

The bloc has proposed tightening up how foreign banks from Switzerland, Britain, Japan, the United States and elsewhere can offer wholesale market services to customers in the EU.

The proposals follow Brexit, which saw UK banks setting up branches in the bloc, and have rung alarm bells at some foreign banks, Reuters reported last month.

Many foreign lenders currently offer wholesale services directly from abroad, while others use a branch in an EU state, both cheaper than a subsidiary, which would require more capital and liquidity held locally, an expensive undertaking.

In some cases there would not be enough business to justify a branch, let alone a subsidiary, and EU customers would end up having less choice if the banks pulled out of the bloc, foreign bank officials say privately.

But Alexandra Jour-Schroeder, deputy director general at the EU executive European Commission’s financial services unit, said there were a “number of misunderstandings” about the EU proposals.

“A lot of international banks are doing good business in the EU member states, and we very much welcome that. We want competition, but we want a level playing field and that is the crux of the issue,” Jour-Schroeder told an event organised by the International Swaps and Derivatives Association (ISDA), an industry body.

Some foreign banks use a branch in one EU state to undertake business in another, creating risky blind spots, she said.

A branch with assets of around 30 billion euros ($34 billion) would trigger a review by regulators on whether it should become a subsidiary, she said.

“There could be as a last resort the possibility to oblige the banks to become subsidiaries,” Jour-Schroeder said.

Debbie Toennies, head of regulatory affairs at JPMorgan Chase & Co’s corporate and investment bank, told the same event she understood the rationale behind the EU’s proposals, but they would come at a cost.

“Being a global bank and having business in the EU, it does affect how efficient we can be if we are forced to turn branches into subsidiaries,” Toennies said.

The proposals are before EU states and the European Parliament for approval, with changes likely.

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(Reporting by Huw Jones; Editing by David Holmes)