On 27 October 2021, the European Commission published the EU Banking Package 2021 which contains draft amendments to the centrepieces of European banking regulation, including the Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulations (CRR and CRR II), to expand and revise supervisory powers of competent authorities.

An earlier Blog post focused on the proposed introduction of new notification and assessment procedures for the acquisition of qualifying holdings; material transfers of assets or liabilities and mergers and divisions. This post focuses on the European Commission’s proposed harmonised regime for the regulation of incoming third-country branches. The regulation of these branches has, generally, been localised balkanized among individual EU member states and the European Commission, once again, strives to create a level-playing field for the market access and ongoing supervision of these players.

Conceptually, the proposal puts an end to an approach many member states have traditionally adopted, namely to allow third-country branches, in particular those which: (i) focus on institutional customers; and (ii) are subject to home country regulation and supervision  deemed equivalent, to access their markets without the need for a physical establishment or a licence in the relevant member state.

Market access

Under the revised CRD IV (CRD VI), market access would, generally, be reserved for institutions establishing a third-country branch, whereas the provision of cross-border banking services from third countries would not be allowed, unless the services are provided on the basis of reverse solicitation. In addition, third-country branches would require a licence. Waivers from the licence requirement, as, for example, available under the German Banking Act could no longer be granted and third-country branches benefiting from such waivers would have to obtain a licence to continue doing business in the relevant Member State. It should be noted that such licence e would not serve as a passport to carry out regulated activities across the EU, but only allow the provision of services in the Member State whose competent authority has issued that licence.

Branch categorisation

Third-country branches would, generally, be divided into two categories, namely Class 1 and Class 2 branches. Third-country branches having more than EUR 5 billion in assets or accepting deposits from retail customers or whose home countries do not have an equivalent supervisory system would qualify as Class 1 (high risk), whereas all other third-country branches would qualify as Class 2 (lower risk). Regulatory requirements for such Class 1 and Class 2 third-country branches would be stricter or looser respectively. For example, Class 1 third-country branches would require an endowment capital of 1% of the average liabilities across the last three years, but of at least EUR 10 million, whereas, for Class 2 third-country branches, only a minimum endowment capital of EUR 5 million would apply. In each case, the endowment capital must be deposited in a blocked account and pledged to the competent resolution authority.

In addition to these main categories of third-country branches, the proposal also contains special rules for systemically important third-country branches, which are defined as branches with assets in excess of EUR 30 billion. Individual member states could require these branches to incorporate (i.e. subsidiarise) which would facilitate the ring-fencing of assets in case of resolution. Alternatively, individual member states could impose a size cap on such branches banning them from exceeding the EUR 30 billion threshold. In any event, member states will have the power to impose capital buffers to account for the specific risks associated with such systemically important branches.  

Impact for firms

Whether or not the proposal of the European Commission requires third-country institutions to, potentially, materially adjust the way they are doing business in Europe depends on the regime of the member state(s) in which such institution is currently operating. Either way, such institutions will need to closely follow the course of the legislative procedure and carefully assess the impact of the proposed amendments on their business model.