How can foreign banks keep doing business in the EU? —— Navigating the waters of CRD VI

CRD VI entails potentially important operational changes for non-EU/EEA¹ banking groups. This is in particular the case for groups originating from third countries considered material by the ESRB², such as the UK, Switzerland, the US, China, Singapore etc., where a higher level of scrutiny from the supervisory authorities is expected. According to its last update the EBA identifies 439 Third-Country Groups (TCGs) from 50 non-EU/EEA countries that are currently active in the area. Only 61 TCGs³ have currently branches in the EU/EEA, resulting in a total of 95 third country branches (TCBs) spread across the EU/EEA.

The population of foreign banks can be split as follows：

• Foreign Banks⁴ without any presence in the EU/EEA: Banks domiciled outside the EU/EEA and operating in the EU/EEA without a physical presence there or “TCGs”: they may need to strengthen their presence by establishing a branch or TCB in the area to keep servicing EU/EEA clients;
• Foreign Banks operating through a Branch in the EU/EEA, i.e. current TCBs: they may be subject to significantly enhanced prudential requirements (capital, liquidity etc.) or to convert into a subsidiary; 
• Foreign Banks having already established a subsidiary in the EU/EEA: they may be forced to implement a holding in a form of an Intermediate Parent Undertaking (IPU).

After a short presentation of the general principles of CRD VI, this article discusses the consequences for each type of foreign banking group.

1. General Overview of CRD VI

Note: as a reminder only foreign banks that have established a subsidiary in one of the Member States (or EU/EEA state) can passport their activities in the whole single market.

CRD VI harmonises the prudential requirements for providing banking services to EU/EEA clients and counterparties by third-country banks. As a result, specific cross-border banking services would be materially restricted, and third-country institutions would need to establish branches or subsidiaries in the EU/EEA as per CRD new article 21c.

The provision of cross-border services is restricted with regards to the ‘core banking services’ as defined in points 1, 2 and 6 of Annex I to Directive 2013/36/EU: lending, guarantees and commitments and taking deposits and other repayable funds.

Yet the restriction of cross-border core banking services is subject to various exemptions, specifically regarding:

• Reverse solicitation, i.e. where a client or counterparty approaches an undertaking established in a third country at its own exclusive initiative for the provision of any service or activity⁵;
• Interbank transactions, i.e. the client or counterparty is a credit institution;
• Intragroup transactions, i.e. an undertaking of the same group; and
• Core banking services ancillary to investment services, as defined in Directive (EU) 2014/65 on market in financial instruments.

2. Consequences for Banks without Branches or Subsidiaries in the EU/EEA

To keep operating in the single market, TCGs, without an existing presence in the UE would be required to establish or move business to branches or subsidiaries in the EU/EEA Member States. Consequently, they should:

• Strategize: reconsider their overall presence in the EU/EEA market considering the new rules applying to banking services and re-authorisation requirements. 
• Plan: design a new operating model for the new entity, typically by way of intercompany transactions, with a definition of new transactional set-up, risk allocation, roles and responsibilities, in line with prudential requirements.
• Execute: incorporate the subsidiary / branch. Establishing a TCB is subject to an explicit authorization procedure. They should as well consider and, potentially, execute the transfer of banking activities and/or bankers from third country entities to the EU/EEA.
• Operate: finally operate the newly created entity on the long term.

Please note that the “Execution” step would entail critical challenges from an operational, IT, legal, tax and transfer pricing point of view.

3. Consequences for Banks with Branches in the EU/EEA

CRD VI also entails a requirement for enhanced regulatory requirements for branches depending on a new classification defined in article 48a, in terms of:

• Prudential Supervision: The activities in the value chain of banking services need to be monitored. Respective control frameworks ensure compliance of regulated activities. In practice  branches would likely require enhancing their local capabilities and their level of local functionality, in terms of roles, risk management authorizations, etc.
• Capital and Liquidity Requirements: To manage an increased balance sheet, additional capital and liquidity requirements would be required as per article 48e and 48f, funding sources must be available and new risk positions must be managed resulting from heightened risk exposures and increased total risk-weighted assets (RWAs). Non-EU/EEA banks often mitigate market and counterparty risk by hedging these risks. However, if these banks must transfer services and associated risks to EU/EEA branches and subsidiaries, it would be necessary to review these risk management strategies.
• Internal governance: Under article 48g, TCBs should have at least two persons in the relevant Member State effectively directing their business subject to prior approval by the competent authorities. Those persons shall be of good repute and possess sufficient knowledge, skills and experience and commit sufficient time to the performance of their duties.
• Booking requirements:  As per article 48h, TCBs would be required to maintain a registry book which would allow the branch to keep a comprehensive and precise record of all the assets and liabilities booked or originated by it. The registry book provide all necessary and sufficient information on the risks generated by the TCB and on how they are managed. A forthcoming EBA regulatory technical standard (RTS) should specify the methodology to identify and keep a comprehensive track record of the assets and liabilities booked by the TCB in the Member State.
• Reporting requirements: Under article 48k, TCBs would be required to periodically report to their competent authority information on : (i) The assets and liabilities held on their books in accordance with Article 48h ; (ii) The compliance with the requirements of the CRD ; (iii) The deposit protection arrangements available to depositors ; (iv) Any additional regulatory requirement.
• Conversion to Subsidiary: With additional assets resulting from the migration of business in the EU/EEA, TCBs may face additional prudential requirements if they cross the 40 bn EUR materiality threshold which would require to establish a subsidiary in the EU/EEA in line with article 48i or tightened supervision.

4. Consequences for Banks with Subsidiaries in the EU/EEA

Those banks have generally established subsidiaries in the EU to benefit from the passporting of their activities, i.e. the freedom of establishment and the freedom to provide services. This means that most of them would have at least one another physical presence in the area, which would trigger the establishment of a so-called IPU, should the sum of their EU assets exceed EUR 40 bn. Please note that currently 8 groups have established intermediate parent undertakings (IPUs) as per current CRD article 21b⁶.

5. Timing

The legal text of CRD VI was enacted on 19 June 2024. Member states are required to integrate the provisions of the Directive into their respective national legislations by 10 January 2026 and make them applicable the day after, while rules for cross-border business restrictions and TCB prudential supervision would only apply from 10 January 2027. However, Member States may still derogate in advancing this date to respectively January 2026 for the former and July 2026 for the latter.

6. Where Forvis Mazars can help

The CRD VI now establishes that, except for specific situations, Banking Groups outside of the EU/EEA will have to potentially substantially change the way they operate, in particular those operating without a physical presence in the EU/EEA or by ways of a Branch:

• Banking Groups without a physical presence in the EU/EEA: would have to apply to be authorized to operate as a branch.
• Banking Groups operating through a Branch: provided regulation of TCB would be significantly enhanced, firms may need to rethink their operating model in the area, in particular when passporting activities considerations are at stake. Changes in booking models, substances, capital needs, supervision requirements may be warranted.
• Banking Groups operating through a Subsidiary may want to keep an eye on the size of the business, which may require the establishment of an IPU.

Forvis Mazars professionals, from all service lines including legal, regulatory, tax or accounting, stand ready to support firms to navigate these uncharted waters, in particular with regards to the items below:

• Strategic analysis of Target Operating Models (TOMs) (functions, transactions) in light of prudential, tax and operational constraints
• Banking License: Manage the acquisition of the banking license 
• Booking and Operating Model: Management of new booking and operating model from a regulatory, operational and tax / transfer pricing standpoint
• Prudential Compliance, in particular reporting requirements

• ¹The European Economic Area (EEA), i.e. the EU member states, Iceland, Liechtenstein and Norway. 
• ²European System Risk Board 
• ³i.e; potentially 378 TCGs would currently operate without a branch or subsidiary 
• ⁴Banking entities domiciled outside the EEA.
• ⁵Competent authorities would require credit institutions and branches established in their territory to provide them with the information they require to monitor the services provided at the own exclusive initiative of the client or counterparty established or situated in their territory where such services are provided by undertakings established in third countries。
• ⁶Article 21b was introduced by directive EU 2019/878 or “CRD V”.