On 27 October 2021, the European Commission published the EU Banking Package 2021 , which is intended, among other things, to complete the implementation of Basel III (sometimes referred to as ‘Basel 3.1’ or ‘Basel IV’). This includes the introduction of an output floor for internal model based calculations of own fund requirements; the introduction of specific rules for the management of ESG risks in accordance with the EU Sustainable Finance Strategy; and the expansion and revision of supervisory powers under the Capital Requirements Directive IV (CRD IV). The new requirements will be brought in under the Capital Requirements Directive VI (CRDVI) and Capital Requirements Regulation III (CRRIII).
In particular, the Package also includes proposals for the harmonisation of the notification and assessment procedures for certain transactions, notably: (i) acquisitions and divestitures of qualifying holdings; (ii) material transfers of assets and liabilities; and (iii) mergers and divisions, each by or of entities subject to the CRDIV/CRR framework. Currently, these transactions are only subject to supervisory scrutiny in certain EU Member States. The European Commission takes the view that this fragmentation of supervisory powers has led to an uneven playing field and, potentially, to regulatory arbitrage. It therefore proposes the introduction of mandatory notification and assessment procedures for these transactions across the EU.
Transactions subject to supervisory scrutiny
In-scope of the new notification and assessment procedures are acquisitions of qualifying holdings (divestitures only require notification, but no supervisory assessment) by credit institutions and mixed financial holding companies which exceed 15% of the eligible capital of the acquirer.
Transfers of assets and liabilities will be subject to supervisory scrutiny if they are at least equal to 10% of the total assets or liabilities of such entity, or 15% of its assets or liabilities, where the intended transfer is performed within the same group. However, for public policy reasons, while also seeking to maintain financial stability as the ultimate goal of prudential supervision, certain types of asset transfers will be exempt from this regime. These are: (i) transfers of non-performing assets; (ii) transfers of assets for the purpose of being included in a cover pool within the meaning of the Covered Bonds Directive and for the purpose of securitisation; and (iii) transfers of assets or liabilities in the context of the use of resolution tools, powers and mechanisms provided for in the BRRD.
Finally, mergers and divisions will be captured by the new notification and assessment regime without materiality thresholds applying.
Key features of the notification and assessment procedures
Generally speaking, the new procedures closely mirrors shareholder control procedures. All transactions subject to the new regime require an ex-ante notification of the national competent authority and closing of these transactions is subject to supervisory approval. For acquisitions of qualifying holdings and material transfers of assets and liabilities, approval is deemed to have been obtained if the national competent authority does not object to the proposed transaction within ,generally, 60 working days following the filing of a complete notification by the notifying entity (known as ‘tacit consent’). Only mergers and divisions require explicit regulatory approval (except in the case of group internal transactions).
The common goal of all these procedures is to ensure the soundness of the prudential profile of the relevant entity after the completion of the proposed transaction. To this end, the Commission proposes partially overlapping and diverging assessment criteria for the different types of transactions included in its proposal. For all of these transactions, national competent authorities shall assess whether: (i) the entity will be able to comply and continue to comply with the applicable regulatory framework as set out, in particular, in CRDIV/CRR; and (ii) there are reasonable grounds to suspect that the transaction entails money laundering or terrorist financing, or could increase the risk of either. In addition, the assessment of acquisitions of qualifying holdings shall also include an assessment of the repute, knowledge, skills and experience of any new member of the management body of the acquirer (the ‘fit and proper’ test) The assessment of mergers and divisions includes an assessment of the reputation and financial soundness of entities involved in the proposed transaction and whether the implementation plan of the proposed operation is realistic, sound and efficient from a prudential perspective.
The European Commission's proposal for this expansion of supervisory powers (and other changes to CRD IV) are currently been discussed by the Council and the European Parliament and must be implemented into national law within 18 months of the entry into force of CRDVI.