Comment letter on the intermediate EU parent undertakings proposal

The Financial Services Agency and the Bank of Japan sent a comment letter on April 17, 2017 to the European Commission (Director General at DG FISMA), the Council of the European Union (Director in charge of ECOFIN) and the European Parliament (Chair of ECON, Rapporteurs on CRD and BRRD) regarding the comprehensive package of proposals to further strengthen the resilience of EU banks, which the Commission published last November.

For our comment letter, please find below.

JFSA and BOJ’s comment on the intermediate parent undertakings proposal

This letter is to comment on the comprehensive package of proposals to further strengthen the resilience of EU banks, which the Commission published last November. A particular focus is on Article 21b of the Capital Requirements Directive (‘CRD Article 21b’), which sets out requirements for certain non-EU groups to have intermediate EU parent undertakings in the Union.
 
The explanatory memorandum of the proposal states that the objective of CRD Article 21b is to “facilitate the implementation of the internationally agreed standards on internal loss-absorbing capacity.” We share this objective, but it should be achieved in the most efficient way possible.

In developing a business plan in the EU, non-EU financial groups will face additional uncertainty and costs arising from the proposal. This, coupled with the uncertainty and costs associated with Brexit, may work to decrease the attractiveness of the EU as a financial center. As long as uncertainty remains, financial institutions have to prepare for the highest-cost scenario. Given the uncertainties, even an institution with a small footprint in the EU may have to consider the possibility of being required to change their organizational structure and the potential change of their competent authorities.

We would like to see the contents of the rules and the process to finalize them designed to address these concerns. Specifically, we would like to draw your attention to the following points:

i.  Japanese authorities do not impose comparable requirements on foreign financial institutions in Japan
　 at this point.
ii. The scope of the proposed rules is broader than that of the intermediate holding company rules in the 
    US. Whereas the threshold of the US rules applies to foreign G-SIFIs based on the size of their total
    assets in theUS rather than on the number of entities they have in the US, the proposed rules require
    third-country global systemically important institutions with two or more institutions in the EU to
    establish an intermediate parent undertaking in the EU regardless of their asset size in the EU. Although
    the US rules do not include branches when calculating the size of total assets, the proposed rules do.
    While the US rules have a threshold of USD 50 billion of total assets in the US, the proposed rules have
    a lower threshold of EUR 30 billion of total assets in the EU.
iii. The coverage of CRD Article 21b is likely to be broader than that of the range of entities that are
    expected to issue internal TLAC by the international standards. Section 17 of the FSB TLAC term
    sheet provides as follows.
 

“A sub-group of a resolution entity is considered ‘material’ for purposes of applying the Internal TLAC requirement if the subsidiary alone or the subsidiaries forming the sub-group on a sub-consolidated basis at the level of the sub-group meet at least one of the following criteria:

1. have more than 5% of the consolidated risk-weighted assets of the G-SIB group or
2. generate more than 5% of the total operating income of the G-SIB group; or
3. have a total leverage exposure measure larger than 5% of the G-SIB group’s consolidated leverage exposure measure; or
4. have been identified by the firm’s CMG as material to the exercise of the firm’s critical functions (irrespective of whether any other criteria of this Section are met).”

Currently, 5% of the total assets of the smallest Japanese G-SIB amount to EUR 80 billion.  Even if Japanese G-SIBs were to establish intermediate parent undertakings, those undertakings will not meet any of the criteria above. CRD Article 21b is likely to require setting up an intermediate EU parent undertaking even if the thresholds in the FSB TLAC term sheet are not reached.

In addition to the intermediate parent undertakings requirements, the proposals to further strengthen the resilience of EU banks include proposals on the implementation of Basel III. However, the proposals contain some elements that are not fully consistent with Basel III. We expect that the proposals will be finalized in conformity with the internationally agreed framework.
 
We understand the proposals will be finalized through the coordination process among the European Commission, European Parliament, and European Council. We look forward to continued dialogue on this matter.

Contact

Office of International Affairs, Planning and Coordination Bureau

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