The Impact of The Capital Requirements Directive VI (CRD VI)

The contents of this blog are for general information purposes only and do not constitute legal advice. Association of Foreign Banks disclaims liability for actions taken based on the materials. Readers should consult their legal advisers.

On 19 June 2024, the long-awaited final Capital Requirements Directive VI (CRD VI) was published in the Official Journal of the EU, which can be read in full here. Now an official EU Act, the timelines have been triggered for the implementation of the new rules, which will apply to all non-EU banks providing services across the region. With just one year and five months to go, EU Member States will also need to act efficiently to transpose CRD VI into national law by their deadline of 10 January 2026.

For AFB members who provide cross-border banking services between EU Member States, or from overseas jurisdictions into the EU, CRD VI will prompt a review of current structures to ensure compliance with the new requirements.

Background

In the three and a half years since CRD VI was first proposed in October 2021, we have seen vast legislative and regulatory amends, so let us refresh your memory.

CRD VI was first introduced as part of the EU’s ‘Banking Package’, which sought to improve the resiliency of EU banks to economic shocks. Although an EU act, it is important to note that the CRD VI requirements and prohibitions also apply in EEA states, whilst banks headquartered in EEA states are not considered as third country institutions.

In general, CRD VI aims to harmonise the prudential supervision of third country branches (TCBs) across EU Member States, through the introduction of new minimum prudential and regulatory requirements, which are laid out in Article 48. The other significant requirement in CRD VI is set out in Article 21c, which prohibits overseas banks from providing cross-border core banking services into EU Member States, subject to a number of specific exemptions. Both are discussed in further detail below.

Article 21c

Article 21c stipulates that from 11 January 2027, a third country institution must establish and be authorised as a branch (or subsidiary) in each EU Member State to commence or continue providing core banking services in the relevant jurisdiction. In effect, this prohibits non-EU banks from providing these services from overseas jurisdictions (such as the UK) into the EU, subject to a number of specific exemptions.

This means that AFB members will no longer be able to passport from a TCB into other EU Member States and must instead establish a TCB in every Member State where they wish to provide these services. However, in an indication that the EU aims to encourage subsidiarisation, subsidiaries of third country institutions will be permitted to offer their services cross-border to Member States where they do not have a physical presence.

Article 21c will therefore require banks to reconsider their overall business model and potentially implement significant changes. For example, banks may need to consider moving in-scope activities to an existing EU entity within their group. For some banks, the requirement to establish a new branch may mean the provision of their services in certain Member States is no longer viable, where the investment in such a branch would outweigh their potential revenue.

As a result, CRD VI may deter non-EU banks without a branch or subsidiary from providing financial services into the EU, whilst also limiting the range and accessibility of services provided by existing branches there. For EU clients and internationally active firms, this may further hamper their ability to manage risk and liquidity.

Given that many non-EU banks currently provide services into EU Member States through passporting or national exemptions (both of which will no longer be possible), we can overall expect that this provision will have a negative impact on the accessibility of financial services in the region.

Article 48

Article 48 sets out the new minimum prudential and regulatory requirements for TCBs, in relation to capital endowment and liquidity, booking, and international governance and risk management. These new rules will begin to impact banks ahead of the implementation deadlines, as they begin gap analyses to identify whether they require re-authorisation (TCBs must meet the new standards to receive approval for a licence).

Several new provisions, such as the prudential requirements, are unlikely to have a significant impact on existing TCBs, as many branches are already subject to equally stringent rules under the national law of their host Member States.

However, Article 48 also introduces onerous reporting requirements, including on the use of reverse solicitation. This comes as part of regulatory efforts to increase scrutiny on business conducted on this basis, with reverse solicitation being one of the exemptions to cross-border activities prohibited in Article 21c.

Article 48 also classifies TCBs into either Class 1 or Class 2 based on their size and activities, with those in the first category being subject to more stringent requirements. For example, Class 1 TCBs would be required to submit reports at least biannually and Class 2 TCBs at least annually.

Crucially, Article 48i also grants National Competent Authorities (NCAs) the power to require a TCB to subsidiarise should they deem it necessary. When the aggregate EU assets of a TCB (or TCBs within the same group) exceed EUR 40 billion, a mandatory assessment of systemic importance will be conducted by the NCA, which will consider the list of factors given in the article to reach its decision. If an NCA deems the TCB of significant systemic importance, it has several courses of action available – it may impose additional supervisory requirements on the TCB, require it to restructure so as to cease to qualify as systemic or, as a more stringent measure, require it to subsidiarise.

The overall impact of CRD VI

Although CRD VI aims for greater harmonisation, it only sets out minimum requirements and grants NCAs discretion in interpreting and implementing these rules. The likelihood that NCAs will increase the stringency of these requirements will depend on each jurisdiction’s existing regulation and own priorities, such as their objectives for attracting foreign investment.

For example, whilst Article 21c details the core banking services which fall under the prohibition, NCAs will have the power to determine exactly when activities are classed as in-scope or not.

AFB engagement on CRD VI

In AFB’s initial feedback on CRD VI to the European Commission (here), we highlighted the benefits of non-EU banks being able to provide financial services in the EU. Any restrictions on this therefore have potential for detrimental and long-term impacts on competition and access to markets in this region.

Since the CRD VI proposals were first published in October 2021, AFB has continued to engage with the relevant bodies and our members, to support and represent the views of non-EU banks affected. AFB maintains a CRD VI Working Group and is holding a series of practice roundtables in 2024 for our members as they prepare for implementation. The materials from these sessions, held in partnership with A&O Shearman, can be read by members here (first session) and here (second session).

If you are an AFB member and are interested in joining the CRD VI Working Group, please email Robert Kemble.