Governing the ins and outs of the EU’s banking union

The Czech Republic, Hungary and Poland do not plan to join the banking union of the EU in the near future. However, their banks may enter the banking union through the back door if transnational parent groups decide to convert subsidiaries in these countries to branches. This article provides qualitative evaluation of factors that may induce or prevent such subsidiary-to-branch conversions. It reviews factors that determine banks’ choice of legal form of market presence as well as supervisory tools that host authorities may employ in order to discourage a potential shift to branches. It concludes that uncertainty over client reaction is the most potent deterrent, while non-imposition of special taxes on the financial sector and minimization of relative regulatory burdens may also help to discourage such conversions. Nonetheless, if transnational banks decide to shift the supervision of their local units to the banking union, the Central European host countries might be compelled to opt-in as well in order to retain some supervisory control over large segments of their foreign-dominated banking sectors.