The evolving European regulatory framework of banking groups

by Vincenzo Troiano *

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ABSTRACT: The regulatory framework of the banking field has evolved through successive interventions which come to  affect the characteristics and organisational structure of the operators, especially cross-border groups and the European presence of third countries groups. This essay analyses certain profiles of CRD V and the more recent CRD VI proposal, with a specific focus on the regulation of financial holding companies and mixed financial holding companies, as well as on the development of harmonised rules of European components of third country groups.

SUMMARY: 1.  The evolution of the European regulatory framework from the perspective of the prudential supervision of banking groups. – 2. The structure of CRD V: approval and exemption of the (M)FHC. – 3. (cont’d): establishment of the intermediate holding company.  – 4. The CRD VI proposal: the regulation of European subsidiaries of third-country banking groups. – 5. Conclusions.

1. The rationale behind the vigorous evolution of the European regulatory framework is to strengthen the banks’ prudential safeguards as well as to enhance the supervisory reactiveness and anticipation ability in respect of operational, organizational, and capital weaknesses of the business operators[1].

The regulation has gradually introduced regulatory tools that, especially in relation to capital dynamics, respond to the need of increasing the resilience of the banking sector.

In addition to these measures, there are others which, again with a view to increasing the effectiveness of supervision and, where appropriate, resolution, affect the shape and structure of the European credit sector.

Attention here is limited to the analysis of certain relevant profiles of CRD V[2] and the more recent proposal for CRD VI[3]. In particular, we shall consider issues related to the features of consolidated supervision within banking groups, whilst at the same time referring to the related greater enhancement of the role of financial holding companies and mixed financial holding companies[4], as well as to the development of harmonised rules for the control of European components of third country groups[5]. In the latter respect, reference is made, on the one hand, to the introduction of a regulation for the establishment of intermediate holding companies at European level and, on the other, to the recent proposal for a more structural harmonisation of the regime of European subsidiaries of third country groups. 

Although the examined measures differ in their approach and intensity, they share some basic features. Firstly, they refer to the credit market at a European level, since the measures would be less relevant if considered in relation to a single country and are hence based on multi-jurisdictional contexts. Secondly, they respond to a renewed need for overcoming domestic segmentations and different application approaches of the relevant legal framework, also for the purpose of avoiding potential regulatory arbitrage[6]. In addition, they aim at strengthening the interactions between different national competent authorities, in the light of issues exceeding a purely national dimension (without prejudice, of course, to the operation, in the relevant circumstances, of the SSM).[7]

The unitary trajectory of these measures marks the progressive tension between the new supervisory issues and national competences of sector authorities. Indeed, the former consist in phenomena and organizational structures that exceed the boundaries of national jurisdictions, whilst the latter are involved in complex coordination mechanisms. In a situation of such complexity, relief can be only partially provided by the functioning of the SSM, within the euro area, while is foreseeable an increasing prospective role of the EBA, in defining common rules and resolving conflicts.

2. In the approach of CDR V, an important role is played by the need to improve the effectiveness of consolidated supervision, with specific regard to the evolving subjective and territorial configurations of banking groups operating in the Union.

As expressly stated in the recitals of the directive, the regulatory intervention moves from the consideration that (M)FHCs are often parent undertakings of banking groups with the consequence that the application of the prudential requirements is required on the basis of the consolidated situation of such holding companies. Hence, as the institutions controlled by these companies are not always able to ensure compliance with the requirements on a consolidated basis throughout the group, it is necessary to bring certain (M)FHCs under the direct scope of supervisory powers under CRD IV and CRR, so that they can be held directly responsible for ensuring compliance with the prudential requirements on a consolidated basis, while not subjecting them to additional prudential requirements on an individual basis (see recital 3, CRD V).

The achievement of the objectives programmatically set out in the recitals of the Directive is firstly achieved through an intervention on the relevant definitions of “institution”, “parent institution in a Member State”, “EU parent institution” and “parent undertaking” of the CRR, which are now understood as including, inter alia, the aforementioned (M)FHCs, which have been granted approval[8].

The most impactful aspect of the system designed by the European legislator is centered on the approval of the (M)FHC by competent authorities. The approval allows (M)FHC to be able to play the role of an entity at the top of a banking group and as such to be able to act as a direct addressee of the sector’s prudential regulation in this capacity.

Although (M)FHCs might be exempted from this role, (M)FHCs are required to seek approval of their role. This provision is aligned with the general approach of the framework, aimed at ensuring that the group’s structure is consistent with the requirements of prudential supervision, according to an approach oriented towards the primary objective of achieving effective forms of control over the group.

This general approach is reflected in the entire discipline of the approval phase, from the definition of the requirements for the granting of approval, to the supervisory measures that can be adopted in the event of non-approval, to the hypothesis of exemption.

As regards the requirements, in first place, the relevant regulation emphasizes the need for internal arrangements and a distribution of tasks within the group adequate for the purpose of complying with the requirements of the sectoral discipline and to guarantee throughout the group an effective prevention and management of intra-group conflicts and compliance with group wide policies set by the parent company. On the other hand, it is required that the structural organization of the group to which (M)FHC belongs does not obstruct or otherwise prevent the effective supervision of the group members with regard to the obligations on an individual, consolidated or sub-consolidated basis to which they are subject. As can be seen, therefore, particular emphasis is placed on profiles related to the role of governance within the group, without prejudice to the logic of the supervision of the regulated components of the same (see Art. 21a, par. 3, CRD IV). And this in an overall framework that, in terms of indications of intent, underlines how the approval and supervision of certain (M)FHCs “should not prevent groups from deciding on the specific internal arrangements and distribution of tasks within the group as they see fit to ensure compliance with consolidated requirements, and should not prevent direct supervisory action on those institutions within the group that are engaged in ensuring compliance with prudential requirements on a consolidated basis ” (see recital n. 4, CRD V).

The link between consolidated prudential supervision requirements and the (M)FHC regime is even more pronounced when analyzing the provisions relating to the possibility of non-approval of the (M)FHC if the requirements are deemed not to be met. In this case, the (M)FHC will be “subject to appropriate supervisory measures to ensure or restore, as the case may be, continuity and integrity of consolidated supervision and ensuring compliance with the requirements” on a consolidated basis[9]. It is relevant to note that the legislator provides for different types of supervisory measures, ranging from, among others, the issuance of injunctions or penalties against the company or its representatives, to the limitation or prohibition of distributions or payments of interest to shareholders, to the suspension of voting rights with respect to the shares held in the subsidiaries or, even, the requirement to divest from or reduce holdings in the institutions or in other financial sector entities  or to transfer them to the shareholders of (M)FHC (see. Art. 21a, par. 6, CRD IV). These measures derive from the clear regulatory choice to pursue an effective management of supervision on a consolidated basis. Indeed, they are characterized by being strongly punitive towards (M)FHCs, in relation to situations that may even be beyond the companies’ control (e.g. the inadequate organizational structure of the group of which the (M)FHC is part), and which in some cases, especially where they affect property or administrative rights of the shareholder, may conflict with the general principles of property protection set forth at national level.

Hence, on the one hand, the possibility that domestic transposition regulations present a fragmented panorama of the measures that can actually be activated by the competent authorities. On the other hand, for the same reasons, the need for the various measures that can potentially be adopted to be activated in concrete terms in compliance with a general principle of proportionality and achievement of the objective targeted by the legislator, with the least possible burden for the recipient of the measure. In this respect, it is important to note, on the one hand, the refusal to grant approval to the (M)FHC may be accompanied, if necessary, by a supervisory measure (see Art. 21a, par. 10, CRD V), and, on the other hand, that, with respect to an (M)FCH, the supervisory measures must take into account the effects on the financial conglomerate (see Art. 21a, par. 6, CRD IV).

The provisions concerning the exemption of (M)FHCs from the approval requirement further confirm the overall logic underlying the entire framework[10]. In first place, in order for (M)FHC to be exempt from the approval mechanism, its principal activity shall consist in the acquisition of holdings in its subsidiaries (and the (M)FHC shall not be designated as a resolution entity). Secondly, it is required that a subsidiary credit institution is designated as responsible for ensuring the group’s compliance with prudential requirements on a consolidated basis, and that such an institution is given “all the necessary means and legal authority to discharge those obligations in an effective manner”[11]. The (M)FHC is also required not to engage in taking management, operational or financial decisions affecting the group or its subsidiaries that are institutions or financial institutions (see Art. 21a par. 4, CRD IV).  Again, the need to ensure compliance on a consolidated basis with the supervisory requirements focuses on the technical and legal capacity of the designated entity to perform this task. Otherwise, the neutralisation of the ability of the (M)FHC to take management or operational decisions that are relevant to the group appears unnecessary and superfluous in the overall framework. From this perspective, the finding that an (M)FHC exempted from the approval requirement may continue to make (non-group-relevant) decisions in the normal course of its business appears insufficient. Analogous considerations can be made in relation to the emphasis put on the competent authorities, which should take into account the relevant requirements under corporate law to which the (M)FHC is subject (see recital n. 5, CRD V). Once again, this points to a purely punitive and unfavourable approach towards the (M)FHC that doesn’t guarantee the compliance with the consolidated prudential requirements, as already seen with respect to the supervisory measures that can be activated in case of non-approval. It shall also be highlighted that the implicit effect of depriving (M)FHCs of their management prerogatives has not been adequately considered. In fact, this may lead the exemption figure to become de facto inactive in conglomerate structures.

The competent authority is called upon to carry out a technically complex and highly discretional[12] analysis both during the approval phase and the phase of assessment of the conditions for (M)FHCs exemption. This process is particularly relevant considering the implications that may arise from the decisions taken here in relation to the structure and articulation of groups, in particular transnational groups.

Hence the specific provisions with which the European legislator intended to regulate the identification of and interaction between the authorities involved in such a process.

As noted above, the origin of the regulatory intervention is the need to ensure a more efficient way of exercising supervision on a consolidated basis. Hence, considering that the main responsibilities for supervision on a consolidated basis are entrusted to the consolidating supervisor, there is a perceived need for this authority to be adequately involved in the approval and supervision of (M)FHCs.

The European framework reflects this basic principle by providing that when the consolidating supervisor is different from the competent authority of the Member State where the (M)FHC[13] is established, the two authorities shall work together in full consultation in deciding on approval and exemption from approval (as well as on supervisory measures)[14].

In fact, the legislative design seems to assign a pre-eminent position to the consolidating supervisor. Although the outcome of the preliminary investigation is a joint decision, duly documented and reasoned, it is certainly relevant that the consolidating supervisor is entrusted with the preparation of an assessment of the issues under analysis (approval, exemption, supervisory measure). Such assessment is then transmitted to the competent authority of the Member State where the (M)FHC is established. Similarly, it is the consolidating supervisor that communicates the joint decision to the (M)FHC. The importance of the role attributed to the consolidating supervisor can be easily explained by the rationale of the entire regulatory framework and, indeed, the model envisaged in the draft directive[15] was far more impactful. If the authorities disagree and the outcomes of the investigations are (at least partially) inconsistent, a possible corrective measure could be found in the mechanism of referring the matter to the EBA in accordance with Article 19 of Regulation (EU) No 1093/2010[16]. It should also be noted that divergences between competent authorities (especially in the Euro area) may be solved by the ECB, which may play a role of synthesis. In this respect, it is worth mentioning the statement that “[t]he European Central Bank, when performing its task to carry out supervision on a consolidated basis over credit institutions’ parents pursuant to Council Regulation (EU) No 1024/2013, should also exercise its duties in relation to the approval and supervision [of (M)FHCs]”. (see Recital 6, CRD V). 

3. While the (M)FHC intervention is aimed at enhancing consolidated supervision of European groups, the regulatory innovations concerning the establishment of an intermediate holding company focus on the need to provide integrated forms of control and supervision of institutions (credit institutions and investment firms) located in European countries and belonging to the same third country group. 

These interventions are inspired by the need to implement in EU law the internationally agreed standards on internal loss absorbing capacity and, more generally, to simplify and strengthen the resolution process of third country groups with significant activities in the EU[17].

Against this background, it is therefore provided, as a general principle, that two or more entities in the Union belonging to the same third country group must have a single intermediate EU parent undertaking established in the Union[18]. Nonetheless, it should be noted that this general principle will only apply in cases where the total value of the third country group’s assets in the Union is equal to or exceeds EUR 40 billion[19]. The requirement only considers the case in which institutions related to the same third country group are established in the Union and not also the case in which such group operates in the Union (exclusively) through branches[20], contrary to what was suggested by the ECB[21]. This circumstance is not insignificant, given that as at 31 December 2020 only two non-EU groups have subsidiaries in more than one Member State, whereas it is much more common to have several branches or a subsidiary and one or more branches[22].  

There are, however, two important exceptions to this general principle, whereby competent authorities may allow institutions to have two intermediate EU parent undertakings.

The first exception considers the case where the creation of a single intermediate EU parent undertaking would make resolution less effective than in the case of two intermediate EU parent undertakings. The assessment concerning the resolution effectiveness must be made by the resolution authority that would be responsible for the intermediate EU parent undertaking. In such a case, the creation of the single parent undertaking would not facilitate, but rather render less effective any resolution action of the EU components of the third country group, and would therefore contradict the very purpose of introducing the regulatory requirement.

The second hypothesis admits the possibility of having two intermediate EU parent undertakings where the establishment of only one would “be incompatible with a mandatory requirement for separation of activities imposed by the rules or supervisory authorities where the ultimate parent undertaking of the third-country group has its head office”[23]. This provision, which takes up a similar indication formulated by the EBC[24], raises some doubts. Indeed, it provides for an exception (based on third – country regulatory provisions) of a requirement set for supervisory and resolution purposes. Hence, it, de facto fragments the regime based on the nationality of the banking group and makes prevail limitations (such as the obligation of separation of activities) introduced in other jurisdictions. Such limitations were introduced for purposes certainly justified in those countries, but are not for this reason more relevant than those adopted by the European legislator with the introduction of the requirement of authorization of the intermediate EU parent undertaking. On the other hand, it enlarges the scope of derogation by including within it the hypothesis where the mandatory requirements of activities separation were adopted by the competent third – country supervisory authorities. In doing so, it grants the latter the possibility of decreeing the existence of a regulatory requirement otherwise provided for by European regulations.  

In order to enhance compliance with the requirement for institutions belonging to third country groups, the competent authorities are entitled with an active function of monitoring and initiative. Indeed, these authorities must ensure that each institution operating in their jurisdiction that belongs to a third country group meets at least one of the following conditions: a) it has an intermediate EU parent undertaking; b) it is an intermediate EU parent undertaking; c) it is the only third country group institution in the Union; or d) it belongs to a third country group whose total assets in the Union are less than EUR 40 billion (see Art. 21b par. 7, CRD IV)[25].

4. The CRD VI proposal builds on the reforms implemented by the Union over the past decade. It aims to increase the resilience of the financial sector and has the overarching objective of contributing to financial stability and orderly financing of the economy in the context of recovery from the COVID-19crisis[26]. This objective is reflected in specific technical measures aimed at, inter alia, strengthening the risk-based capital framework and further harmonising supervisory powers and tools.

This is the context where we can observe an intervention with a considerable impact on the structural configuration of the Union banking services market. This intervention entails measures concerning the activity of third countries banking companies in the Union, and, more in general, aiming at harmonising  the regime applicable to branches of non-EU institutions.  The CRDV didn’t intervene directly on these profiles, referring to a possible later date[27].

As regards the first aspect, the CRD VI proposal requires a physical presence in a Member State through a branch or legal entity in order to provide banking services in the Union. This is because only with such a physical presence can credit institutions be effectively subject to EU prudential regulation and supervision[28]. It follows from this approach that Member States shall subject the exercise of banking activities to the establishment of a branch, which shall be authorised pursuant to the new rules in preparation[29]. The credit sector is characterized by stricter provisions compared to those provided for under MiFID, which entrusts Member States with the assessment of whether to make the performance of investment services and activities in the Member State subject to the establishment of a branch[30]. Such greater strictness, is justified by the type of activities considered, as seen in the context of the overall protection of the financial sector stability.

The proposal also confirms that there is no obligation to establish a branch in cases of reverse solicitation, where third-country firms provide banking services in a Member State on the sole initiative of clients and counterparties, “as in this case it is the customer that approaches the undertaking in the third country to solicit the provision of the service“[31].

Certainly, the overall impact on the structure of the European banking sector will be greater as a result of the measures that the CRD VI proposal introduces regarding the treatment of branches of groups from third countries.

In this respect, the regulatory intervention moves from the observation that there is a robust presence of third country branches in the EU. The individual asset size of some third country branches exceeds the threshold that would make them qualify as significant institutions under the direct supervision of the ECB in the context of the single supervisory mechanism[32]. However, the phenomenon is regulated solely by national law. This situation not only leads to a lack of consistency in the regulation of these entities, with potential risks of regulatory arbitrage, but also makes it difficult for the competent authorities to adequately monitor the risks arising from the activities of these branches in the EU, with the resulting potential risks for financial stability and market integrity in the EU[33].

In light of the above, we can understand the call for a harmonization of the legal framework of third country branches (“TCBs”). The harmonizing measures, in accordance with the principle of proportionality (hence the foreseen identification of class 1 and class 2 branches, on the basis of size and risk criteria)[34], aim at establishing an ad hoc set of minimum harmonisation requirements by using as a starting point the relevant national provisions concerning authorisation, minimum requirements, reporting obligations and supervisory procedures. 

The most important feature of the proposed framework relates empowerment of the competent authorities, which are enabled to require the conversion of the branch into a subsidiary by requiring third country branches established in their territory to apply for authorisation as subsidiary entities.

This would be the case, for example, if a branch poses risks to the financial stability of the Member State concerned or the EU in light of specific systemic risk indicators, or if the branch has been assessed as “systemically important”[35] on the basis of a comprehensive assessment process entrusted to the consolidating supervisor that is or would[36] be responsible for the group, or to EBA[37].

The proposed intervention does not lead to a direct change in the rules governing the establishment of intermediate holding companies, which remain anchored to the presence of two or more entities; it goeswithout saying that these rules could be indirectly affected in all cases where the competent authorities request the transformation of a subsidiary into an institution for a third State group already present with another institution in the territory of the Union.      

5. The regulatory framework of the banking field has evolved through successive interventions which come to affect the characteristics and organisational structure of the operators, especially cross-border groups and the European presence of third countries groups. In the near future, this may lead to significant changes in the structural framework for the provision of banking services within the Union by these institutions. At the same time as these changes are being made, it will be necessary to assess the most appropriate methods of supervising there entities.  Such assessment will be even more compelling if the operational and functional coordination mechanisms between the competent national authorities do not achieve the adequacy and operational efficiency necessary to give full meaning to the design that the European legislator has set out to achieve with the regulatory innovations mentioned above.

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[1] Gulija and Singh, European Banking Union: Context, Structure, Challenges and Opportunities, 2021, available at SSRN: https://ssrn.com/abstract=3846338 or http://dx.doi.org/10.2139/ssrn.3846338.

[2] Directive No 2019/878/EU of 20 May 2019 Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards exempt entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers, and capital conservation measures (the “Directive”, or the “CRD V”)

[3] Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks, and amending Directive 2014/59/EU, 27 October 2021, COM(2021) 663 final (the “CRD VI proposal”). 

[4] As defined in Article 4.1. points 20 and 21, of Regulation (EU) No 575/2013 (hereinafter, the “CRR”); hereinafter, when taken together, the “(M)FHCs”, when the reference is to the mixed financial holding company only, the “MFHC”. 

[5] See, Gortsos, The New EU Regulatory Framework Governing the Approval and Consolidated Supervision of Financial Holding Companies and Mixed Financial Holding Companies, 2021, available at SSRN: https://ssrn.com/abstract=3834246 or http://dx.doi.org/10.2139/ssrn.3834246.

[6] See, in general terms, Zeitlin, Uniformity, Differentiation, and Experimentalism in EU Financial Regulation: The Single Supervisory Mechanism in Action (May 31, 2021), Amsterdam Centre for European Studies Research Paper No. 2021/04, available at SSRN: https://ssrn.com/abstract=3857077 or http://dx.doi.org/10.2139/ssrn.3857077.

[7] The rationale underlying the overall framework of the regulation introduced by CRD V is clearly indicated in the context of the subsidiarity justification for the proposed action, where it is stated that “[t]he amendments would further promote a uniform application of prudential requirements, the convergence of supervisory practices and ensure a level playing field throughout the single market for banking services. These objectives cannot be sufficiently achieved by Member States alone. This is particularly important in the banking sector where many credit institutions operate across the EU single market. Full cooperation and trust within the single supervisory mechanism (SSM) and within colleges of supervisors and competent authorities outside the SSM is essential for credit institutions to be effectively supervised on a consolidated basis. National rules would not achieve these objectives”: see Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards exempt entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers, and capital conservation measures, 23 November 2016, COM(2016) 854 final (the “Proposed Directive”), p. 5.

[8] This intervention is, in fact, grounded on the objective of ensuring “that requirements or supervisory powers laid down in this Directive or in Regulation (EU) No 575/2013 apply on a consolidated or sub-consolidated basis in accordance with this Directive and that Regulation” (see Art. 3(3) CRD IV).

[9] See Art. 21a, par. 6 CRD IV

[10] It should be noted that the exemption of the approval requirement does not lead to the exclusion of (M)FHC from the scope of consolidation established by the sectoral rules (see Art. 21a (4) CRD IV).

[11] See Art. 21a, par. 4 CRD IV

[12] In this respect, it is relevant that the EBA has been expressly given the possibility to adopt guidelines to “specify a common assessment methodology for granting authorisations” (see Article 8(5) CRD IV).

[13] CRD IV (as amended by CRD V) sets out in Article 111 the basic criteria for identifying the supervisor on a consolidated basis. In particular, where the parent of an institution is a parent financial holding company in a Member State, a parent mixed financial holding company in a Member State, an EU parent financial holding company or an EU parent mixed financial holding company, supervision on a consolidated basis is exercised by the competent authority that supervises the institution on an individual basis (see 111(2), CRD IV). In addition, where two or more institutions authorised in the Union have the same parent financial holding company in a Member State, parent mixed financial holding company in a Member State, EU parent financial holding company or EU parent mixed financial holding company, supervision on a consolidated basis shall be exercised by (a) the competent authority of the credit institution, where there is only one credit institution within the group; (b) the competent authority of the credit institution with the largest balance sheet total, where there are several credit institutions within the group; or (c) the competent authority of the investment firm with the largest balance sheet total, where the group does not include any credit institution (cf. 111(3) CRD IV).

[14] A further element of complexity arises in the case of MFHC. In this situation, if the consolidating supervisor or the competent authority of the Member State where the MFHC is established is different from the coordinator determined pursuant to the financial conglomerates framework (Directive 2002/87/EC, art. 10), the agreement of the coordinator is also required for the adoption of joint decisions (see Art. 21a, par. 9 CRD IV).

[15] The draft Directive assigned the competence to authorize the (M)FHC to the consolidating supervisor; if this authority was different from the competent authority in the Member State where the (M)FHC was established, the consolidating supervisor would have to consult the competent authority: see Art. 1, per 9, of the draft Directive. On this point, rlevant appear the impact of the guidance provided by the EBC in its Opinion of 8 November 2017 on amendments to the Union framework for capital requirements of credit institutions and investment firms, (CON/2017/46) (2018/C 34/05) (the “Opinion”), where it pointed out that “the effect of the proposed amendments on Article 111 of the CRD needs to be considered. It is of particular concern that the consolidating supervisor might be located in a different jurisdiction from the financial holding company or the mixed financial holding company. The consolidating supervisor would then need to ensure compliance with consolidated requirements by a financial holding company or a mixed financial holding company established in a different Member State. The proposed amendments to the CRD should include provisions that set out in greater detail how to carry out efficient cross-border cooperation in such a case” (1.10.3, Opinion).

[16] If the agreement of coordinator is required, any disputes are referred to the competent European Supervisory Authority, i.e. EBA or EIOPA.

[17] See Proposed Directive, p. 13.

[18] The intermediate EU parent undertaking is a credit institution or (M)FHC that has been granted approval under Article 21a. However, if none of the institutions is a credit institution or the second intermediate EU parent has to be established in relation to investment business in order to comply with the mandatory ring-fencing requirement (see below in the text), the intermediate EU parent or the second intermediate EU parent may be an investment firm authorized under the sectoral rules.

[19] In particular, it is provided that the total value of the third country group’s assets in the Union consists of the sum of: (i) the total value of the assets in the Union of each institution of the third country group resulting from its consolidated balance sheet or from the individual balance sheet in case the balance sheet of the institution is not consolidated; and (ii) the total value of the assets of each branch of the third country group authorized in the Union (see Art. 21b, per. 5, CRD IV).

[20] Operating through branches is valued solely for the purpose of assessing whether the group’s operational relevance thresholds in the Union are exceeded.

[21] In the Opinion, the EBC indicated that in order to avoid regulatory arbitrage, “the requirement should apply to both third-country credit institutions and branches (i.e. also in cases where the Union operations of the third-country group carried out, partially or exclusively, via branches)”. (1.6, Opinion).

[22] See EBA, Report to the European Parliament, the Council and the Commission on the treatment of incoming third country branches under the national law of Member States, in accordance with article 21b(10) of directive 2013/36/EU (EBA/REP/2021/20 – 23 June 2021) p. 13.

[23] See Art. 21b, par. 2, CRD IV.

[24] See Opinion point 1.6.: “[i]n the event of conflict between third-country laws and the requirement for a single intermediate EU parent undertaking, which could prevent or unduly complicate compliance with the intermediate EU parent undertaking requirement, a derogation should be explored”.

[25] It is envisaged that the EBA will publish on its website a list of third country groups operating in the EU and intermediate EU parent companies.

[26] See CRD VI proposal, p. 3.

[27] Against the express indication of the ECB (see Opinion, point 1.6: “[i]t is also important, in the longer term, to harmonise the regulatory and supervisory framework of third-country branches in the Union”), CRD V provided that

by 28 June 2021, the EBA should have submitted a report to the European Parliament, the Council and the Commission on the treatment of third country branches under the national law of Member States, to assess whether further harmonisation of national regimes is appropriate or necessary, in particular with regard to significant third country branches, on the basis of which the Commission would consider whether to make an appropriate legislative proposal. See in this respect, the above-mentioned EBA Report (EBA/REP/2021/20 – 23 June 2021).

[28] See CRD VI proposal, p. 13. In particular, the intervention is based on the consideration that the provision of banking services without a branch or a legal entity established in a Member State would contribute to maintaining market segments outside the scope of Union prudential regulation and supervision. This could lead to a situation where risks accumulate without specific forms of control, thus endangering the financial stability of the Union or its Member States (see recital 3, CRD VI proposal).

[29] See Art. 21c of CRD VI proposal, which refers, as regards the subjective application of the requirement of prior authorisation and establishment of a branch, to the provisions of Article 47, par. 1 and 2 of the same proposal.  It follows that the requirement covers, in practice, the carrying out by third country firms of any of the activities listed in Annex I of CRD IV and of the activities referred to in Article 4, par. 1(1)(b) of the CRR (if the firm meets any of the criteria set forth in points (i) to (iii) of that point). However, if the third country firm is not a credit institution (or a firm that meets the criteria set out in par. 1(b) of Article 47 of the CRD VI proposal), the carrying out of the activities listed in points 4, 5 and 7 to 15 of Annex I of CRD IV in a Member State is subject to MiFID rules on the establishment of branches (Title II, Chapter IV of Directive 2014/65/EU).

[30] See Directive 2014/65/EU, Art. 39.

[31] See recital 3, CRD VI proposal and Art. 21c.

[32] See CRD VI proposal, p. 15.

[33] This is mainly due to the absence of a common regulatory framework, whether at prudential or governance level, which leads to significant divergences in requirements across Member States; the limitations of the current supervisory cooperation mechanisms at EU level, which do not take into account third country branches; the increasing trend towards digitalisation of financial services, which makes it effectively impossible to preserve the rule that third country branches are only allowed to provide services in the Member States where they are established: see CRD VI proposal, p. 15-16.

[34] In particular, as summarised in the CDR VI proposal, p. 17, class 1 “comprises the largest TCBs (i.e. those holding assets equal to or in excess of EUR 5 billion), as well as TCBs authorised to take deposits from retail customers and TCBs considered “non-qualifying”, the latter two regardless of their size. Class 2 comprises all TCBs not classified as Class 1. A TCB is considered “qualifying” where its head office is established in a country (i) that has in place a supervisory and regulatory framework for banks and confidentiality requirements that have been assessed as equivalent to those in the Union and (ii) that is not listed as a high-risk third country that has strategic deficiencies in its regime on anti-money laundering and counter terrorist financing”.

[35] The assessment is required in case the assets held in the registers of third country branches amount to EUR 30 billion or more and is aimed at verifying whether such branches present a level of risk to the financial stability of the respective Member State and the EU similar to that of institutions defined as “systemically relevant” in the CRR and CRD IV: see CRD VI proposal, p. 17.

[36] Where third country branches are treated as subsidiary entities.

[37] As an alternative to the conversion into a subsidiary, competent authorities may require branches to restructure so that they no longer meet the criteria to be defined as systemically important or fall below the threshold of EUR 30 billion, or to meet additional Pillar 2 requirements aimed at mitigating potential risks to financial stability.

* Full professor of Financial Markets and Intermediaries Regulation in the Department of Economics of the University of Perugia.