Third Country Access to the EEA Banking Market: New EBA Report

The EBA, as well as the ECB and the European Commission (COM), aim at a far-reaching harmonisation of the European banking market based not only on institutional arrangements and procedures, but also on substantive law. So far, substantive European law has only dealt with the establishment and supervision of TCBs in a very fragmentary manner. The Capital Requirements Directive (CRD) is limited in substantive law to mandating that TCBs be treated no better than branches of institutions incorporated in the EEA. This fragmentary rule suggests that TCBs (1) may be treated very differently depending on Member State law, (2) are not subject to ECB supervision under the Single Supervisory Mechanism (SSM), and (3) are not amenable to EBA convergence efforts depending on Member State law.

The latest amendment to the CRD from 2019 provided in Art. 21 b that third-country institutions have to consolidate their activities in the EEA via an EU Intermediate Parent Undertaking. The aim of the regulation was to ensure that several CRR institutions with the same parent are consolidated in the EEA in order to enable their group supervision in the EEA. Although the balance sheet totals of the TCBs have to be included in the assessment basis for determining the need for an IPU, the TCBs are not themselves included in the consolidation. That this should not have been the legislator’s last word follows from Art. 21 (10) CRD; therein the EBA was instructed to submit a report to the COM and the European Parliament on how TCBs should be dealt with under the national law of the Member States. On the basis of the report, the law continues, the COM will submit a legislative proposal. The EBA's report initially comes to interesting economic conclusions: The total number of TCBs is substantial at 106 in 17 member states. There are six significant host countries, namely Belgium (6), Germany (25), France (22), Italy (8) and Luxembourg (14) with total assets of €510 billion, of which 86% is concentrated in Belgium, France, Germany and Luxembourg. The third countries most frequently represented with TCBs are China (18), UK (15), Iran (10), USA (9) and Lebanon (9). Several third countries are represented with multiple TCBs in the EEA; some third countries maintain both TCBs and licensed subsidiaries.

Content of the EBA Report

In terms of content, the EBA report had to address at least three questions: How do regulatory practices differ for TCBs under national law? Does different treatment in Member States lead to regulatory arbitrage? Is there a need for (further) harmonisation of national regulations on TCBs?

Legislation and supervisory practices regarding TCBs vary widely across Member States. Some Member States treat TCBs like subsidiaries and subject them to the rules applicable to subsidiaries; others create a special regime with a simplified treatment of TCBs and often link to the prudential standard in the home state.

The EBA affirms the risk of regulatory arbitrage; admittedly, TCBs cannot make use of the European passport. However, the use of different supervisory regimes may lead to asymmetries. Furthermore, in the absence of material inclusion in the IPU regime, there is no consolidation of assets attributable to TCBs.

In summary, the EBA therefore considers harmonisation of national rules on TCBs to be necessary. According to the EBA, this should involve a centralised, European equivalence assessment and ensure effective supervisory cooperation with home state regulators. The scope of authorisation must also be set up in the same way in all member states and uniform supervisory requirements must be complied with. The last-res applies in particular to own funds, liquidity, internal governance, anti-money laundering provisions, reporting, accounting treatment and resolution planning. As a safeguard and in the event of a crisis, a mechanism - the EBA added - to enable the TCB to be converted into a subsidiary.

Thus, a Commission draft for the harmonisation of the treatment of TCBs can be expected in the near future. It is foreseeable that the Commission will attempt to bring TCBs as close as possible to the treatment of subsidiaries. According to the author's assessment, we can expect that this will severely limit the advantages of TCBs, for example with regard to the flexibility of own funds management, and that there will be a legislative incentive to convert TCBs into subsidiaries.

Modes of entry into the EEA

With that, let us briefly assess all modes of entry into the EEA and their convergence: Both, licensing for subsidiaries and ownership control are harmonised at the European, and indeed Directive, level. Even if this is not full harmonisation, the relevant EBA guidelines set the pace; moreover, at least for the euro area, the ECB is the final decision-making authority for the question of institution formation and for the question of ownership control. Access via EEA branches or via intra-EEA trade in services is also harmonised. If there will be a change in the law as suggested by the EBA, access via TCB would also be harmonised. Only one access mode would remain, namely cross-border banking into the EEA, which would not yet be regulated under European law. If one considers that the ECB recently prepared a critical overview of the legal options in the Member States that are still in conflict with convergence, we can expect that there will be an additional need for further harmonisation in these areas.

The German solution

Turning now to Germany, the report makes the German solution of treating TCBs "like credit institutions" seem almost like a blueprint for eliminating all of the EBA's concerns. Where could things still get hairy? A "conversion-into-a-subsidiary mechanism" does not yet exist under German law. This question also touches on the non-harmonised German company law and the conflict-of-law issue of the admissibility of such a conversion according to the domicile law of the head office. An equivalence requirement or "memorandum of understanding" (MoU) requirement also creates problems. Neither has there been a convergent equivalence determination to date, nor do the MoUs of the Federal Republic with third countries to date indicate whether they meet the requirements of the EBA. Finally, Section 53c KWG, which authorizes the BMF to exempt TCBs from the application of provisions of the KWG - as has been done through KWG exemption regulations - is unlikely to be in line with the findings of the report.

As a result, the relative national autonomy for the treatment of TCB would be removed. This is unlikely to please those member states that are home to many TCBs, such as Belgium, Germany, France, Italy and Luxembourg. Also, neither China, nor Japan, nor the UK, nor the USA, as important home states to TCB, are likely to be particularly pleased, because they would see themselves exposed to a new, not necessarily more favorable regime.

The EEA is well on the way to harmonising third country access to the EEA banking market. The question of whether remaining national options really lead to regulatory arbitrage or to improved competition is debatable.

_{Published: October 2021}