CRR2 and CRD V: impacts for 'financial holding companies' and the 'intermediate parent undertaking'

On April 16 2019, the European Parliament adopted the so-called 'banking package', a package of legislative acts, which amend inter alia the Capital Requirements Directive (CRD), the Capital Requirements Regulation (CRR), the Bank Recovery and Resolution Directive (BRRD) and the Deposit Guarantee Scheme Directive. The adoption marks the final milestone, following approximately three years of negotiations between the Commission, Parliament and Council.

Alongside the revision of the prudential framework for the implementation of Basel III, the amendments to CRR and CRD will change the regulatory framework governing the control of institutions. The amendments relate principally to two types of institutions: firstly, those with primary seats outside the EU; and secondly, those which are subsidiaries of non-licensed holding companies.

'Intermediate EU parent undertakings'

The provisions on 'intermediate EU parent undertakings' affect an institution being part of a third country corporate group, provided that:

• the group has at least two licensed institutions in the EU
• the total value of the group's assets in the EU exceeds EUR 40 billion

if so, one of the institutions has to be named as the 'intermediate EU parent undertaking'.

The primary reason for this is to address prudential consolidation on a group level. Under CRD IV/CRR, it was not possible to assess the capitalisation of the group’s subsidiaries operating in the EU. With the new rules, the authorities will be empowered to ensure sufficient capitalisation for such institutions in the event of the group's insolvency.

In cases where the establishment of one intermediate EU parent undertaking would be inappropriate for the group:

• because of the relevant third country's laws, or
• where the establishment of one intermediate EU parent undertaking would hinder the resolvability of the institutions (according to the assessment of the relevant EU resolution authorities)

the third country group may establish two intermediate EU parent undertakings.

The new provisions on intermediate EU parent undertakings may necessitate the restructuring of a third country group operating in the EU by way of two or more licensed subsidiaries directly controlled from outside the EU. In this case, the group's corporate structure might need to be amended.

Licensing obligations for 'financial holding companies'

The second amendments affect so-called 'financial holding companies'. According to the revised definition in Art. 4(20) CRR2, 'financial holding company’ means 'a financial institution, the subsidiaries of which are exclusively or mainly institutions or financial institutions, at least one of such subsidiaries being an institution, and which is not a mixed financial holding company'.

'Institution' is separately defined as 'a credit institution or an investment firm'. 'Financial holding companies' are companies which are not themselves licensed institutions.

The role of such companies will change significantly due to the introduction of the banking package.

Currently, the definition of financial holding companies does not affect the financial holding company itself but rather serves the purpose of clarifying group structures. However, under CRD V/CRR2, financial holding companies will become subject to licensing obligations themselves.

According to the new Art. 21a CRD V, as part of the licensing procedure, the financial holding company will have to provide information on:

• the structural organisation of the group
• information on the management of the financial holding company, which must consist of at least two directors who are competent and reliable ('fit and proper')
• the shareholders of the company
• an appropriate internal governance.

Furthermore, financial holding companies will then be subject to ongoing supervision by the relevant authorities, which is a significant change to the current situation.

Entry into force

CRD V and CRR 2 will now be published in the Official Journal of the EU, which is expected for the end of Q2 2019; they will enter into force 20 days later. Member States will then have 19 months to implement CRD V into domestic law.