By Huw Jones

LONDON (Reuters) -European Union regulators are considering tougher scrutiny of foreign bank branches in the bloc whose ranks have been swelled by Brexit to create “negative risks”, sources familiar with the discussions have said.

It is the latest sign of how the departure of Britain, Europe’s biggest financial centre, from the EU is causing a rethink in Brussels of how to regulate the sector.

The bloc’s European Banking Authority gave a presentation to EU officials earlier this month setting out the rapid growth in third country bank branches, the sources said.

By December 2020 when Britain left the EU, there were 106 branches of foreign banks across 17 of the 27 member states, holding 510 billion euros ($623.53 billion) in assets, the sources said of the presentation.

The branches are concentrated in Belgium, France, Germany and Luxembourg, those attending the meeting were told.

Since Brexit, there are 14 more branches and a 30% increase in assets, or 120.5 billion euros, compared with totals at the end of 2019.

Most of the branches are for banks from China, Britain, Iran, the United States and Lebanon.

EBA told the meeting there were “regulatory arbitrage opportunities” due to a patchwork of national waivers for branches from capital and liquidity rules.

While branches of foreign banks are only allowed to operate in the EU state they are based, they have links across the bloc’s internal market, especially those involved in wholesale market operations, the sources said.

EBA noted a “risk of negative cross-border spill-over effects”, the sources said.

The EU is introducing new rules for non-EU banking groups, requiring them to consolidate their operations under an “intermediate parent undertaking” or IPU.

The aim of an IPU is to help EU supervisors make sure foreign banks have enough capital in the bloc and make it easier to close them down when in trouble.

But the EBA noted that even though the IPU system is being rolled out, activities may still be carried out via third country branches outside the new EU rules.

(Reporting by Huw Jones, editing by David Evans and Louise Heavens)

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