EU Banking Package - New Rules for Third-Country Banks

EU legislators agree on harmonised requirements for market access for entities from third countries

The European Commission, the European Parliament and the European Council have concluded their trilogue negotiations by reaching a final compromise on the Capital Requirements Directive (CRD VI) and the Capital Requirements Regulation (CRR); the result was published on 6 December 2023. Following the final vote in the European Parliament scheduled for the first half of 2024, implementation is expected to take place soon afterwards. This merits taking a closer look at the new CRD VI rules for entities from third countries.

European Commission's Banking Package 2021

The changes under CRD VI are derived from the "Banking Package 2021", which the European Commission presented in October 2021. The package aims in particular to strengthen the resilience and future viability of European banks and entails a revision of the CRR in addition to the new version of the CRD. The amendments to the CRD include introducing new minimum regulatory requirements for the activities of entities from third countries in the European Union (EU) or the European Economic Area (EEA). This is intended to eliminate or minimise current differences in the supervision of these entities in the various Member States.

Provision of core banking services

Third country entities are only covered by the new rules under CRD VI if they provide core banking activities and would qualify as a credit institution within the meaning of Article 4 (1) no. 1 CRR if they were established in the EU or EEA. CRD VI defines core banking activities as accepting deposits and other repayable funds, lending, including among other things, consumer loans, loans relating to immovable property, factoring, financing commercial transactions and providing guarantees and commitments. Interbank services provided to another bank, intragroup services and scenarios where the EU customer approaches the entity in the third country directly (reverse solicitation) are excluded from the scope of application, see Article 21c CRD VI.

In addition to banks, this includes investment firms that provide corresponding investment services and whose consolidated total assets, independently or as part of a group, reach or exceed the total value of EUR 30 billion.

To establish a sufficient link to the EU, any activity of the third-country entity in connection with one of the above services to EU customers should be sufficient, as the EU Commission expresses a broad understanding of the provision of services "in a Member State" in its documentation.

Branches are subject to the same requirements, but no European passport

Under Article 21c CRD VI, in future entities in third countries operating in the EU must have a branch in the Member State in which they wish to provide the respective services.

The branch must be authorised by the national supervisory authority responsible for the Member State concerned in accordance with the same standards or stricter standards than those applicable to domestic entities. It is therefore subject to the same authorisation requirements as domestic entities and pursuant to Article 47 CRD VI may not be governed by more favourable conditions. To ensure uniform application of the law here too, Article 48c CRD VI sets out minimum requirements for authorisation in the Member States. Article 48d CRD VI takes this further and sets out the grounds for the refusal or withdrawal of an authorisation.

However, unlike domestic entities, pursuant to Article 48c CRD VI branches cannot use the "European passport" to operate from one Member State into other Member States. The activity of the branch is limited to the Member State concerned.

Article 48c (5) CRD VI protects existing contracts between undertakings established in the EU and those from third countries that existed before the regulation came into force. However, the practical effects of this grandfathering provision are still unclear in view of the broad wording.

Previously authorisation in Germany mandatory, but possibility of exemption

Regulating undertakings from third countries is currently still the responsibility of the relevant Member State, which has led to a regulatory patchwork in the EU.

The authorisation requirement in section 32 German Banking Act (KWG) already applies in Germany to all undertakings that conduct banking business in Germany, meaning also those based in a third country. Section 53 (1) KWG expressly stipulates that domestic branches of undertakings domiciled abroad are to be deemed a credit institution or financial services institution and in accordance with section 53 (1) sentence 1 KWG are therefore also subject to the authorisation requirement of section 32 (1) KWG.

Only cross-border services from third countries may be exempt in accordance with section 2 (5) KWG. Accordingly, BaFin may in individual cases exempt institutions domiciled in a third country that provide cross-border banking or financial services and are therefore also subject to the authorisation requirement, provided that it deems the supervisory system in the home country to be equivalent and cooperation with the authorities of the home country is satisfactory with regard to the supervision of the entity. This applies, for example, to Swiss or American institutions.

In addition, entities with branches in Germany generally have the option of an exemption in individual cases in accordance with section 2 (4) KWG, provided that the entities are deemed credit institutions or financial services institutions under section 53 (1) KWG. In this context, BaFin can exempt an entity from the authorisation requirement if the nature of the business it conducts does not require supervision by BaFin.

The compromise that has now been reached at EU level does not explicitly address the possibility of continuing such exemptions. However, the purpose of the amendment to the Directive to create a standardised regulatory framework in the EU and set minimum requirements for the supervision of third-country entities suggest that these national exemptions will no longer be permitted in future under the new legal situation. It is unclear how to deal with exemptions that have already been granted. It will be up to the German legislator and BaFin to provide the necessary clarity.

Renewed authorisation requirement for entities which are already authorised

The new Article 21c CRD VI covers "commencement and continuation" of the relevant activity. This implies an obligation to (re)apply for a licence, even if third-country entities already require a licence, as is the case in Germany under section 53 KWG (see above). This understanding is underpinned by Article 48c (1) CRD VI. According to this provision, Member States must require that third-country entities are obliged to establish branches "before commencing or continuing the activities", whereby establishing a branch is in turn subject to authorisation in accordance with the provisions of Article 48c ff. CRD VI.

Article 48c (5) CRD VI leaves it up to the Member States to exempt certain entities from the obligation to submit another application for authorisation. However, as it is worded, it only applies to entities that received their authorisation twelve months before the new regulations came into force. Here is will also be up to the German legislator and BaFin to provide the necessary clarity.

Concretisation of the provisions in the new Article 48a ff. CRD

According to Article 48a CRD VI, the Member States have to classify the branches into two categories based on defined criteria. The decisive factor for their classification is the risk posed by the branch's activities to market integrity and financial stability in the respective Member State and the EU as a whole.

Branches fall into the first category if

• the total value of assets booked or originated by the branch in a Member State in the annual reporting period is EUR 5 billion or more,
• the branch's authorised activities include taking deposits or other repayable funds from retail customers where the amount of such deposits and other repayable funds exceeds 5% or more of the branch's total liabilities or the amount of such deposits and other repayable funds exceeds EUR 50 million; or
• the branch is not a qualified branch within the meaning of Article 48b CRD VI.

A qualified third-country branch exists if

• the head undertaking of the branch is established in a country whose regulatory and supervisory framework are at least equivalent to the CRD and CRR,
• the supervisory authorities responsible for the head undertaking of the branch are subject to confidentiality requirements at least equivalent to those in CRD VI, and
• the country in which the branch's head undertaking is established is not a high-risk third country with strategic deficiencies in its regime on anti-money laundering and counter terrorist financing in accordance with Article 9 of Directive (EU) 2015/849.

Articles 48e to 48i CRD VI contain capital endowment requirements and requirements on liquidity, internal governance, risk management, booking and record keeping. Under Article 48j CRD VI, the national supervisory authorities are also to be given the power to require branches to establish subsidiaries, if necessary, which then have to be authorised as CRR credit institutions. Such an arrangement will be necessary in particular in the context of risk management. Further powers and obligations of the supervisory authorities are set out in Article 48n ff. CRD VI. For example, in accordance with Article 48l CRD VI Member States must require that branches issue reports on a regular basis. In terms of content, the reporting obligations cover, in particular, regulatory and financial information about the branch in the third country and the head undertaking. Pursuant to Article 48m CRD VI, the EBA is to develop standardised forms and templates for the fulfilment of these obligations.

Effects also expected for Germany

The new regulations are expected to be implemented in the first half of 2024. After the envisaged entry into force on 1 January 2025, the Member States will have until autumn 2026 to transpose the regulations into national law in accordance with the 18-month time limit for transposition.

Even if the effects will not be as drastic in Germany as in other Member States due to the existing licensing requirement for branches of entities based in a third country, the entities which are based here in Germany should familiarise themselves with the changes early on and, if necessary, prepare their (new) applications for authorisation.

Also, entities which have operated cross-border into Germany to date without their own licence on the basis of an exemption under section 2 (5) KWG should keep an eye on further developments and consider possible adjustments to their business models.