Third country banking groups with two or more subsidiary institutions in the EU will be within scope if they fall into one of two categories. First, they will automatically be subject to the requirement if they have been designated as ‘Globally Systemically Important Banks’ (G-SIBs) by the Financial Stability Board (a designation that has, since its inception in 2012 largely been followed by home country regulators). Second, other (i.e. non-G-SIB) third country banking groups will be caught if the total value of their assets in the EU is at least €30 billion.
The ‘total value of assets in the EU’, includes all assets of the group’s EU subsidiaries and EU authorised branches. Additionally, though the test to determine whether an institution is “significant” under the Single Supervisory Mechanism (SSM) is also €30 billion, the SSM test considers the assets of a single institution and does not similarly account for branch assets. This means that the EU IHC test may capture a broader scope of entities than just those supervised by the ECB under the SSM.
The primary effect of the EU IHC requirement is to establish a single EU intermediate parent and so create an EU sub-consolidation group within a broader third country banking group. Although there must be a single EU IHC for all institutions that are part of the same third country group, there is no requirement to establish a new entity – instead entities could be reorganised to lie under an existing entity. The proposal does not dictate where in the EU the EU IHC must be established.
The creation of a new EU sub-consolidation group would not necessarily increase capital, liquidity or TLAC9 requirements. This will depend largely on how the new EU sub-consolidation group is structured and the linkages (e.g. intra-group debts and funding arrangements) that are maintained or created between its constituent entities. However, it is important to recall that EU subsidiaries are already subject to the EU’s prudential rules under CRD IV / CRR and that consolidated requirements can be less than the sum of requirements that apply to individual entities.
It is generally thought that third country groups would face increased costs due to the on-going suite of obligations that come with consolidation, including consolidated reporting / disclosure, risk management and governance. Where the EU IHC is established in the Eurozone, it can be expected that the ECB would take on the consolidated supervision for any new EU sub-groups which contain an institution that meets the €30 billion threshold as this coincides with the trigger for its role under the SSM.
From a resolution perspective, for those third country banking groups that are subject to ‘Single Point of Entry’ (SPE) resolution, the Commission’s claim that the EU IHC requirement improves the resolvability of third country G-SIBs can be challenged as this entails that only the third country entity at the top of the global group is subjected to resolution whilst its subsidiaries (such as the EU IHC) continue to operate. However, it is arguable that having a group of entities subject to consolidated oversight – rather than independent subsidiaries of a third country parent – may simplify resolution in planning and implementation. Further, if for any reason the third-country SPE resolution were to fail, despite the BRRD’s co-operation mechanisms, this simplification may enable EU resolution authorities to conduct a resolution of the EU sub-group (though this benefit would potentially be undermined by allowing an operating entity to act as the EU parent undertaking). Finally, the EU sub-group may also have an EU Resolution College (in addition to the likely existence of a global Crisis Management Group) and, for those EU sub-groups supervised by the ECB under the SSM (per above), it is expected that the EU’s Single Resolution Board will be the EU sub-group’s resolution authority.