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EBA Draft RTS on Prudential Consolidation under Article 18 of the CRR

Core Content

The European Banking Authority (EBA) has published a draft Regulatory Technical Standard (RTS) on the methods of prudential consolidation under Article 18 of the Capital Requirements Regulation (CRR). The document outlines the legal basis, structure, and key elements of the draft RTS, as well as the next steps and key questions for public consultation.

Legal Basis

• Article 18(7) of the CRR mandates the EBA to develop draft RTS to specify conditions for prudential consolidation in the cases referred to in paragraphs 2 to 6 of Article 18.
• The EBA informed the European Commission that it would delay the submission of the draft RTS to incorporate the work of the Basel Committee on Banking Supervision (BCBS) on step-in risk.
• The Commission published the CRR II/CRD IV proposal on 23 November 2016, which includes amendments to Article 18 of the CRR. The draft RTS is based on the current CRR text.

Structure of the Draft RTS

Main Elements

Scope of Prudential Consolidation

• Scope: Includes institutions (credit institutions and investment firms), financial institutions (as defined in Article 4(1)(26) of the CRR), and ancillary services undertakings (as defined in Article 4(1)(18) of the CRR) when consolidated supervision is required under Article 111 of Directive 2013/36/EU.
• Methods: Articles 11 and 18 of the CRR define the scope and methods of prudential consolidation.
• Key Questions: The draft RTS includes two questions on the scope of application:
  • Whether undertakings not classified as financial institutions or ancillary services undertakings should be included in the prudential scope of consolidation.
  • Whether securitisation Special Purpose Entities (SPEs) should be considered for accounting and prudential purposes.

Article 18(1) and (2) of the CRR

• Article 18(1): Requires full consolidation of all subsidiaries of institutions and financial institutions.
• Article 18(2): Allows proportional consolidation of a subsidiary if certain conditions are met, upon application to the competent authority.
• Draft RTS: Provides additional specifications to ensure proportional consolidation is only applied in exceptional cases with sound evidence. Institutions must request permission in writing and provide supporting documentation. There is currently no evidence of the use of this exception, and the CRR review proposes its removal.

Article 18(3) of the CRR

• Definition: Applies to undertakings managed on a unified basis or by the same persons.
• Draft RTS: Defines the method of prudential consolidation as the aggregation method under Article 22(8) and (9) of the Accounting Directive (2013/34/EU). It also includes criteria for determining the consolidating entity based on Article 111 of the CRD, and addresses limitations on the recognition of external shareholders in line with minority interest rules.

Article 18(4) of the CRR

• Definition: Proportional consolidation applies to participations in institutions and financial institutions managed together with other non-consolidated undertakings.
• Draft RTS: Specifies that proportional consolidation is mandatory and based on IFRS 11 Joint Arrangements, requiring unanimous consent of the parties sharing control. This may lead to divergence from the accounting treatment, which typically uses the equity method for joint ventures.

Article 18(5) of the CRR

• Definition: Competent authorities determine the method of consolidation for other participations or capital ties not covered by Article 18(1) or (4).
• Draft RTS: Develops the application of this paragraph and introduces indicators from the BCBS guidelines on step-in risk identification and management. It allows for case-by-case determination of the consolidation method and provides the possibility for competent authorities to review the valuation methods of entities outside the prudential scope.

Article 18(6) of the CRR

• Definition: Applies to cases of significant influence or single management not based on a contract.
• Draft RTS: Provides a prudential definition of significant influence based on accounting standards and incorporates the step-in risk indicators from the BCBS guidelines. The prudential treatment is similar to that of Article 18(3), using the aggregation method.

Consolidated Additional Tier 1 and Tier 2 Capital

• The draft RTS clarifies that Additional Tier 1 and Tier 2 capital issued by proportionally consolidated undertakings can be included in total capital.
• Article 82 of the CRR currently defines qualifying capital only for subsidiaries, but the draft RTS extends this to proportionally consolidated undertakings.

Summary of the Draft RTS

The draft RTS provides detailed rules on the methods of prudential consolidation under Article 18 of the CRR, including:

• The scope of entities subject to consolidation.
• Conditions for proportional consolidation.
• Methods for determining the consolidating entity.
• Definitions of significant influence and single management.
• Treatment of other participations and capital ties.
• Clarification on the inclusion of Additional Tier 1 and Tier 2 capital from proportionally consolidated entities.

Next Steps

Timeline

• Public Consultation: Ends on 9 February 2018 (3 months).
• Analysis of Feedback: To be conducted after the consultation period.
• Finalisation and Submission to the Commission: Dependent on the outcome of the CRR review.

Key Questions

1. Subject matter and scope of application:

   • Q1: Are there undertakings that do not meet the definition of financial institution or ancillary services undertaking that should be included in prudential consolidation? Please explain and provide examples.
   • Q2: Do you consider Securitisation SPEs as financial institutions? Should they be consolidated for prudential purposes when consolidated for accounting purposes?

2. Permission for proportional consolidation:

   • Q3: Do you currently use proportional consolidation for subsidiaries? If so, are the conditions in the consultation paper met?
   • Q4: Do you have any comments on the conditions established for proportional consolidation under Article 18(2)?

3. Consolidation of undertakings managed on a unified basis or by the same persons:

   • Q5: Do you agree with the criteria for determining the consolidating entity? Do you experience a different situation?
   • Q6: Do you have any comments on the elements included for the application of the aggregation method?

4. Proportional consolidation of undertakings with limited liability:

   • Q7: Do you have any comments on the application of proportional consolidation under Article 18(4)?

5. Treatment of other participations or capital ties:

   • Q8: Do you have any comments on the criteria for the prudential treatment of other participations or capital ties, including the equity method?

6. Draft cost-benefit analysis / impact assessment:

   • Q9: Do you agree with the impact assessment and its conclusions? Please provide any additional information on costs and benefits.

7. Other comments:

   • Q10: Please provide any additional comments on the consultation paper.

Contact Information

• EBA: European Banking Authority
• Address: Floor 46, One Canada Square, London E14 5AA
• Tel: +44 207 382 1776
• Fax: +44 207 382 1771
• Email: info@eba.europa.eu
• Website: www.eba.europa.eu