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HELSINKI, March 27 (Reuters) - The European Union should tighten supervision of banks turning their euro zone subsidiaries into branches that are regulated outside the bloc, Finland's Central Bank and its Financial Supervisory Authority (FSA) said on Monday.
Helsinki's worries were prompted by a reorganisation by Sweden's Nordea to make its Finnish operations branches rather than using a subsidiary structure. Denmark's Danske Bank has similar plans.
Nordea and Danske together hold about 40 percent of total loans and deposits in Finland's banking market and account for about half the bank branches in the country.
Turning subsidiaries into branches, a practiced dubbed as "branchification", means a large portion of Finland's banking will be supervised by Swedish and Danish authorities, instead of the European Central Bank or Finnish authorities.
"Dependence on branches operated from outside the banking union, as witnessed in Finland, is increasing," Bank of Finland board member Olli Rehn said in a speech on Monday.
"Larger powers of the host country supervisor would support the financial stability of host and home countries alike, and reduce the room for regulatory arbitrage," he said.
The FSA's director general, Anneli Tuominen, has proposed closer cooperation between the supervisors in the host nation and home country of the cross-border banks.
"There should be specific requirements for a joint agreement on most important decisions, such as capital and liquidity requirements, model approvals, approval of recovery plans and issues relating to authorizations", Tuominen wrote in a letter Olivier Guersent, the EU Commission's financial services head. (Reporting by Tuomas Forsell; Editing by Edmund Blair)