CRD VI: third country Banks – Are you Ready for the New Branch Requirement?

In recent years, regulation of the EU banking sector has been moving towards stricter controls over the presence of foreign financial institutions in the European market. One of the key changes has been the CRD VI, which introduces new requirements for third-country banks operating through branches within the European Union. For many market participants, this means having to review their existing business model, assess the costs of complying with the new rules and adapt their internal processes. At the same time, there is growing demand for professional advisory services to help them prepare for the new requirements without the risk of breaching regulatory standards. ELI Swiss supports such projects and specialises in issues relating to international banking regulation across European jurisdictions.

Strengthening reporting and supervision

The new system provides for a unified approach to the reporting of third-country branches. The relevant national competent authorities will have access to both the financial information of the branch itself and data on the parent organisation’s activities. Regulators will assess liquidity ratios, asset quality, corporate governance, internal controls and risk management systems. Significant attention is being paid to anti-money laundering and counter-terrorist financing. The European Banking Authority has already developed standardised reporting templates, which will apply under the new reporting framework. This will enable national supervisory authorities to obtain comparable information on all branches of third-country banks, regardless of their country of registration. The new rules are expected to affect banks from the UK, the US, Switzerland, the Middle East and Asia that serve European clients from outside the EU. In many cases, organisations will have to choose between expanding their existing branches, are expected to affect banks from the UK, the US, Switzerland, the Middle East and Asia that serve European clients from outside the European Union, or scaling back certain areas of their business.

Mandatory establishment of a branch for certain operations

One of the most significant changes has been the requirement to establish an authorised branch in order to provide certain banking services to customers in the EU. Whilst previously certain services could be provided cross-border without a physical presence in a specific EU country, this approach will be significantly restricted once the new rules come into force.This applies to deposit-taking, lending, guarantees and commitments. One of the exceptions applies where a customer independently initiates contact with a foreign bank without prior marketing or solicitation by the financial institution.

New capital requirements

CRD VI introduces minimum capitalisation requirements for branches of third-country banks. The required capital amount will depend on the category of the branch and the scale of its operations. Higher minimum capital requirements apply to Class 1 branches than to Class 2 branches. Third-country branches are also subject to separate liquidity requirements. Furthermore, the required capital endowment must be held in eligible assets and be available to cover the risks and losses associated with the branch’s activities. For a number of banks, this may require additional funding for their European branches or changes to their business structure within the EU.

What has changed with the adoption of CRD VI?

The Capital Requirements Directive VI was adopted as part of the latest phase of reforming EU banking regulation. One of its objectives was to establish uniform rules for branches of banks whose head offices are located outside the European Union. Until now, the requirements for such branches have varied significantly depending on the EU Member State. As a result, some countries offered a more lenient regulatory regime, which allowed foreign banks to choose the most favourable jurisdiction for operating in the European market. CRD VI aims to put an end to this practice. The rules for branches of third-countries banks will now be largely harmonised across the European Union.

Why preparation should not be postponed

Although some of the provisions will be phased in gradually, the preparatory work requires a considerable amount of time. Banks need to analyse their current business models, identify the transactions subject to the new requirements, assess their capital endowment and liquidity needs, and establish internal procedures for liaising with the relevant national competent authorities. ELI Swiss provides consultancy and legal support on matters relating to banking regulation, licensing, engagement with financial regulators and the structuring of international business. The firm’s specialists support projects relating to European financial markets, licences and supervisory requirements. If your organisation requires an assessment of the impact of CRD VI on its existing business model or support in adapting to the new regulations, ELI Swiss’s specialists are ready to provide the necessary support and practical solutions.

FAQ

Which banks are subject to the new CRD VI rules?

The new requirements apply to third-country banks and other qualifying undertakings that provide specified banking services to clients in the EU through branches or cross-border arrangements. This may include institutions from the UK, Switzerland, the US, the Middle East and Asia.

Will foreign banks be required to open branches in EU countries?

In many cases, yes. To offer some types of banking services within an EU country, a financial institution will usually have to set up a licensed local branch there. The ability to provide services exclusively from outside the EU will be significantly restricted.