Background
The Commission’s proposal to amend the current fourth Capital Requirements Directive (CRD IV as amended by CRDV) forms part of its Banking Package 2021. CRD IV is the core legislation for regulation of the EU banking sector. It regulates licensing of EU banks and contains detailed supervisory rules. Additionally, it facilitates the EU single market for financial services by conferring so-called ‘passporting’ rights on EU banks to enable them to provide services on a cross-border basis or establish branches within the EU.
CRD IV is largely silent on the supervisory treatment of non-EU banks, merely requiring that they not be treated more favourably than EU banks. In particular, the treatment of third country branches (TCBs) was left largely to national law. Currently, Member States have considerably different requirements for authorising non-EU banks to provide services and for supervising them.
This divergence has worried the ECB for some time. In its view, harmonising the TCB framework is needed for it to have a comprehensive view on the EU activities of third country banking groups. Ever since the introduction of the Single Supervisory Mechanism (SSM), the ECB has continuously advocated for the inclusion of TCBs in the EU regulatory framework from which they have thus far been excluded.
Key element of the Commission’s proposal
CRD VI consists of five key elements that would shape the “new world” of regulation of third country banks doing business in the EU:
- A requirement to establish a branch when providing banking services in each Member State where services are to be provided coupled with a prohibition to provide cross-border services into the EU from a third country (expect on a reverse solicitation basis);
- Harmonised minimum standards for the authorisation of branches;
- A tiering system for TCBs, based on their activities and size (a TCB is ‘class 1’ if (i) it has assets above EUR 5 billion; (ii) it conducts deposit-taking activity; or (iii) the prudential and AML supervisory framework of its parent entity's jurisdiction is considered not be ‘equivalent’ and TCBs will be ‘class 2’ if they do not meet any of the conditions);
- A subsidiarisation mechanism for systemically important TCBs where a TCB, or TCBs, within the same group whose aggregate assets booked in the EU exceeds EUR 30 bn would be subject to a mandatory assessment process that could result in a requirement to restructure or to subsidiaries; and
- Harmonised ongoing licensing conditions, including minimum prudential requirements and reporting obligations.
Key elements of the ECB Opinion
Scope of the licensing requirement
The proposed Article 21c(1) CRD VI appears to envisage a very broad sweeping prohibition of providing banking services cross-border and requires that third country undertakings establish a branch in order to (continue to) provide such services.
As discussed in our briefing on the proposal, the scope of the licensing requirement is incredibly broad and would cover more than core banking services. It also covers services regulated by other EU legislation, such as investment services under MiFID II as well as payments and e-money services. It also purports to cover activities that to date are unregulated in some Member States.
While the ECB supports the prohibition of the cross-border provision of services into the EU as well as the proposal that TCBs may only provide services to the Member State in which they are established, it is critical of the scope of banking services caught by these rules.
It all but acknowledges the wide scope to be an oversight, suggesting to clarify the wording. In particular, CRD VI should provide a clear list of core banking services that are included within that article, taking into consideration existing requirements in other EU law and the impact of the changes on the liquidity of global financial markets.
Subsidiarisation and tiering system
The ECB expresses support for the proposed subsidiarisation requirement. It supports the proposal that subsidiarisation not be automatically triggered but rather that there be a supervisory assessment if certain thresholds are reached.
Ostensibly concerned that groups with resort to strategic booking practices may circumvent the threshold, the ECB suggests to toughen up the methodology on how the thresholds for the tiering system and subsidiarisation assessment are calculated. The ECB wants to not only consider the assets that are booked in the TBC, but also the assets that are originated by the TCB and booked remotely to another location.
That suggestion reflects the ECB’s critical stance on remote booking and its associated concerns including insufficient local risk management capabilities and heightened counterparty risk in a crisis.
Enhanced reporting requirements
The ECB proposes that the scope of the reporting requirement is expanded in two ways:
Reporting of remote booking
In addition to the new obligation to report on the asset and liabilities on the TCB’s books, reports should include assets originated in that branch and booked remotely to another group entity.
Reporting on reverse solicitation
The Commission proposal contains a requirement in a new Article 48l(2)(f) to report on the services provided by the third country parent into the EU on a reverse solicitation basis. The ECB suggests that it be enhanced to also include reporting of provision of investment services (ie such services regulated by MiFID II) by the parent entity or subsidiaries on a cross-border basis or reverse solicitation basis.
Outlook
The ECB opinion is part of the EU legislative process which the Commission’s proposal is undergoing before it is adopted by the European Parliament and the Council. During the legislative process, comments and lobbying from various stakeholders are likely to have an impact on the final draft.
The suggestion by the ECB to clarify the scope of the cross-border prohibition is welcome as it poses considerable uncertainty and may undermine existing business models, in particular, in the post-Brexit era.
However, the ECB’s sceptical stance on remote-booking also influenced its proposed amendments. The suggested changes would increase the burden of new reporting requirements for TCBs and broaden the base of entities considered to be ‘class 1’ or subject to a subsidiarisation assessment.
In its recent draft report on CRD VI the European Parliament's Economic and Monetary Affairs Committee (ECON) took on board a number of the ECB's suggestions, including on taking into account assets originated in the TCB but booked elsewhere. The draft report does not however contain changes to the scope of Article 21c.
Third country banking groups doing business in the EU should carefully follow the legislative process as CRD VI could have a considerable impact on their business model. It is expected to become law by 2025 after an 18-month implementation period.
For more detailed information implications of the proposed TCB framework, please refer to our briefing.
Further reading
Read the full ECB opinion on the CRD VI here.
Read the blogpost by Frank Elderson, Vice-Chair of the ECB’s Supervisory Board on the ECB opinion here.
Read more on the EU Banking Package 2021 here.
Contact us for a compare version of CRD V/CRD VI to see the suggested amendments.
