Governance and Supervision: Requirements of the supervisor

In the previous two blogs, we wrote about the CRD-requirement for international banks outside the EU (called Third Country Groups or TCG’s) to establish an Intermediate Parent Undertaking (IPU). Or, in a nutshell: the obligation to consolidate TCG entities in the EU to establish the EU Headquarter of the bank. In this blog, we will dive into the requirements of the supervisor (ECB/EBA). The DNB/ECB are important drivers for IPU’s, since supervision will be ‘simplified’ under the umbrella of the IPU. There is one central ‘parent’ in the EU through which supervision is streamlined

TCG’s should assess, at least annually, whether they meet the IPU requirement, or expect to meet it in the foreseeable future. The bank should start to enquire about the requirements for the relevant procedures and start the related preparations at an early stage.

Depending on the TCG’s current presence in the EU, its structural organization could already be compliant with the IPU requirement. If that is the case, one of the EU subsidiaries consolidates the entire EU group. If so, the TCG should inform the consolidating supervisor without delay, of its intention to not undertake any corporate restructuring. In other cases, the current TCG’s presence in the EU may need to undergo restructuring operations. Then, the TCG should contact the consolidating supervisor to present a plan to comply with the IPU requirement. This should be done sufficiently in advance to make sure that the TCG will be able to comply with the IPU requirement upon reaching the IPU threshold of EUR 40 billion. 

Exceptionally, national supervisors may approve the establishment of two separate IPU’s (Article 21b(2) CRD). That basically means that you have the central parent in the home country: the Third Country Group. Then, there are two intermediate parents in the EU: two IPU’s. This is not in line with the aim of prudential consolidation of the EU activities of the TCG. The set-up of two IPU’s is considered an exception to the single IPU requirement. If establishing a single IPU would make resolvability less efficient than in the case of two IPU’s, an assessment must be carried out by the competent resolution authority of the IPU. If the single IPU is incompatible with a mandatory requirement for separation of activities imposed by the TCG home supervisor, a dual IPU can also be taken into account by the IPU supervisor.

However, it is an exception to the single IPU and its approval is subject to restrictive interpretation. The application should provide a detailed description of the applicable TCG home regime, the operational structure and the envisaged allocation of the activities to each IPU in line with the TCG home regime. The assessment of the resolution authority will be based on the potential application of the resolution tools and powers at the EU entity level, such as the allocation of activities between the two IPU’s, and the relevance of the two IPU’s in the light of financial stability considerations. The resolution authority and supervisor will also take into account the potential misuse of the two IPU structures for arbitrage opportunities and unnecessary complexity of the overall structure.

If all the TCG’s subsidiaries in the EU are investment firms, or if a second IPU must be set up because the investment services activities need to be in compliancy with a mandatory separation requirement, the IPU (or the second IPU) may be an investment firm.