Overseas regulators (as host  2  See The PRA’s approach to the implementation of the systemic risk buffer: Statement of Policy; 5 December 2016. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  EMBARGO: not for release before 19:30 on Wednesday 4 October 2017  authorities) use their own rules to set requirements for the subsidiaries in their territories. They might consider these businesses to be systemic on a local basis. They might measure financial transactions under different accounting rules, apply different prudential approaches to assessing risks, or restrict capital transfer to the UK parent. Therefore, a UK bank’s overseas subsidiary might be required to have an outsize portion of its group’s capital. Back at home, the parent might fund the subsidiary’s higher capital requirement by raising debt externally. This is known as ‘double leverage’ and firms use it because debt is generally cheaper than equity. But servicing double leverage relies on flows of dividend income which are uncertain and at the discretion of local boards and supervisors across the group. Or the parent might be incentivised to under-allocate resources to unregulated but risk-taking entities within the group. We need to be mindful of the risks this can create, and so today we are announcing a new approach, to 3  ensure that UK banking groups are at least as strong as their parts . Subject to our consultation:   We will expect firms to demonstrate to us that they can manage the cash-flow and other risks associated with double leverage.

According to the literature, for supervision to be considered effective it should be able to effectively develop, implement, monitor and enforce supervisory policies under normal and stressed economic conditions. BIS (2012) defines several preconditions for effective supervision in practice: 1) sound and sustainable macroeconomic policies as a core precondition for stable financial system; 2) a well established framework for financial stability policy formulation i.e. clear framework for macro prudential surveillance and financial stability policy formulation; 3) proper regulatory environment; 4) a clear framework for crisis management, recovery and resolution; 5) an appropriate level of systemic protection (or public safety net) such is a system of deposit insurance which contributes to public confidence in the system and thus limit contagion from banks in distress and 6) effective market discipline. Transparency is another factor that gains growing importance in recent years. Thus, in order to restore confidence and rebuild financial stability there was a strong push towards supervisors to increase their transparency to the markets and the public. One supporting argument for these trends is the role of transparency as prerequisite for accountability. Higher transparency enhances the legitimacy of the supervisor, also safeguarding his independence. When transparent, the supervisory actions become more predictable thus helping to shape expectations and foster linkages across institutions and markets. Finally, transparency sets the ground for careful and consistent decision-making, reducing the scope for arbitrary decisions. Empirical research (Arnone et al., 2007), finds a positive correlation between the transparency of the supervisor and the effectiveness of banking supervision.