As the CRR3/CRDVI package is a very rich set of texts, several NLs will be written to decipher it. This fourth NL of the CRDVI series deals with the supervision of third country groups

1.   To provide a strong European supervisory framework for third country branches providing banking services in the EU

1.1.   The current prudential framework offers significant regulatory arbitrage opportunities for TCBS

Third country branches (TCBs) are subject to the CRD to a very limited extent. The recent EBA report shows that the current uneven regulatory landscape offers TCBs significant opportunities for regulatory and supervisory arbitrage in conducting their banking activities on the one hand, while leading to a lack of supervisory oversight and increased financial stability risks for the EU on the other hand.

1.2.   The inadequacy of the European supervisor’s toolbox for TCBs

Supervisors often lack the information and powers they need to properly address these risks. The lack of supervisory reporting, common supervisory governance, and insufficient exchange of information between the authorities responsible for supervising different entities/activities of a third country group leaves blind spots.

The EU is the only major jurisdiction where the supervisor on a consolidated basis does not have a complete picture of the activities of third country groups operating through both subsidiaries and branches. These shortcomings not only create risks for financial stability and market integrity in the EU, but also affect the level playing field between third country groups operating in different Member States, as well as vis-à-vis EU-based banks.

2.   Requirement for a third country financial group to set up a branch in the EU with a banking licence approval prior to any direct banking activity

2.1.   Reaffirmation of the importance of the prudential regulatory framework for all banking actors in the EU

Banks are subject to prudential regulation and prudential supervision to minimize the risk of failure and, when it occurs, to manage it so that it does not spread to other banks and market participants. In such case, this can lead to the collapse of the financial system (contagion risk).

Thus, one of the main objectives of prudential regulation is to protect the financial stability of the Union and its Member States.

In view of this objective, it is essential to prevent market segments from falling outside the scope of the prudential regulatory system, as in this scenario, risks could accumulate in these segments in an uncontrolled manner and spread to other parts of the financial system with very damaging effects. This is particularly important in market segments where there is a high degree of interconnectedness between banks.

2.2.   The obligation to set up an authorised branch for third country groups

The provision of banking services in the EU without a branch or a legal person established in a Member State contributes to the creation of such market segments which fall outside the scope of EU prudential regulation.

As a result, third country companies must now set up a branch in a Member State and seek prior banking authorization for that branch before carrying out banking activities in that Member State.

However, this requirement does not apply to cases where such third-country branches engage in the provision of banking services with customers and counterparties in a Member State by reverse solicitation of services, since in such cases it is the customer or counterparty concerned who contacts the third-country branch to solicit the service.

3.   References


Abbreviations and glossary

EBA: European Banking Authority