Q&A on the third-country branch introduced by CRD VI

1. What is the primary focus of CRD VI regarding cross-border banking services in the EU?

CRD VI aims, among other things, to establish harmonised minimum regulatory requirements for the provision of banking services from third countries in and/or into the EU by requiring the establishment of third-country branches. CRD VI contains rules for both licensing and ongoing compliance. This is intended to enhance regulatory consistency across the European banking sector and ensure better transparency towards European supervisors such that they have a more holistic understanding of third-country banking activities into and in Europe, irrespective of the type of establishment, whether branch or subsidiary.

2. What is the background?

The changes result from the Banking Package of 2021 and relate to both the (sixth) Capital Requirements Directive (CRD VI) and the (third) Capital Requirements Regulation (CRR III). The revisions are aimed at adapting to the evolving financial landscape and, in particular, implementing the requirements of Basel IV. Commission, Parliament and Council have spent the past few years negotiating the legislation in the trilogue. The package must now be finally adopted by Parliament before it is published in the EU Official Journal (OJ) and enters into force.

3. What significant change does CRD VI introduce for third-country institutions?

Article 21c of CRD VI introduces a significant change by imposing a ban on third-country institutions providing core banking services (specifically, lending, guarantees, commitments, and deposit-taking) into the EU on a cross-border basis, i.e. without a physical presence. Such institutions are now required to establish third-country branches in each relevant Member State, or one EU subsidiary duly licensed using the EU passport. The provision of cross-border investment services under MiFID (and MiFIR) remains unaffected (i.e. in particular those under Annex I Section A of MiFID).

With this type of single market access rule, the EU emphasises that the measures go beyond Basel IV requirements and are exclusively driven by the European legislator underlining the legislative intent behind the ban: Transparency and Protectionism, tightening and harmonising the EU regulatory framework for regulated banking services.

4. What is the timeline for the implementation of CRD VI?

The timeline depends on when the legislation is published in the OJ, expected in spring 2024. After publication, there will be an 18-month transposition period for Member States to implement CRD VI into national law, followed by a further 12-month transitional relief for third-country branch provisions. The new rules (including licensing) are therefore expected to apply from autumn 2026 allowing the affected institutions to adapt and comply with the regulatory changes. The reporting obligations will come into force 12 months earlier.

5. Which entities fall under the scope of the new prohibition?

The scope of application includes all types of entities that offer core banking services such as lending, providing guarantees and commitments and taking deposits and would therefore be considered a (credit) institution (including financial sector entities) if they were established in the EU. Insurance companies and funds are excluded.

6. How does CRD VI define the provision of services "in" a Member State?

The legislation does not explicitly define what amounts to the provision of a service "in" a Member State. This is subject to further interpretation by the European Supervisory Authorities. However, given that the policy intent is to be rather restrictive, it is possible that all activities with EU clients could be considered as the provision of a service "in" a Member State, applying the solicitation test rather than the place of characteristic performance method. This sets the tone for possible interpretations and emphasises the need for a clear definition of the geographical scope of services.

7. What are the exemptions provided under CRD VI?

Exemptions include interbank services, intragroup services, reverse solicitation and grandfathering of certain existing contracts. Additionally, services provided ancillary to MiFID services (in Annex I Section A) by third-country banks are excluded from the scope. This exemption also includes any accommodating MiFID ancillary services linked to the provision of trading of financial instruments or private wealth management.

The review process before implementation will determine whether exemptions should extend to financial sector entities. Although defined in the CRR and having a broad scope  (including banks, for example), it is yet unclear what the scope of the exemption in the CRD VI will be until the ESAs publish further guidance in this regard.

8. What does the legislation provide for regarding "grandfathering"?

The legislation provides for the grandfathering of "existing contracts" entered into 6 months or more before the end of the transitional relief (probably in the second half of 2025). This provision aims to preserve clients' acquired rights, allowing contracts to continue being serviced cross-border without the immediate requirement to establish a branch (or a subsidiary or relying on another exemption). However, the uncertainty arises regarding the extent of grandfathering and whether material amendments might trigger a licensing requirement, indicating areas for potential future clarification.

9. What is the situation with national cross-border waivers?

National waivers (going beyond grandfathering), such as those used in Germany by US and Swiss banks, would have to be removed with the introduction of Article 21c of CRD VI. Such exempted institutions would then be forced to comply with the new regime. Conversely, since CRD VI is a minimum harmonising directive, national measures that go beyond these requirements will likely continue to apply.

10. What are the options for continuing business under CRD VI (without a branch)?

Firms affected by the regulatory change have various strategic options, such as migrating their business to non-credit institutions or EU group entities (i.e. duly licensed subsidiaries), relying on exemptions or establishing a third-country branch in relevant jurisdictions – due to its non-passport-ability the least favoured option (see below). Each option requires careful consideration, with factors such as operational efficiency, regulatory capital and liquidity arrangements playing a crucial role in decision-making.

11. Does it require a (re-)licensing of an (existing) third-country branch?

In accordance with Articles 47 et seq. of CRD VI, a third-country branch requires a licence from the national competent authority (NCA), which is linked to a number of minimum requirements (see below). All third-country branches within the EU must fulfil these requirements.

Hence, the licensing requirement generally also applies to existing branches of third-country institutions. It is at the discretion of the respective NCA to grandfather existing branch licences that were granted 12 months or more before the application of the CRD VI. This will only be an option where the minimum requirements in the relevant Member State already correspond to those in the CRD VI (as is likely to be the case in Germany, for example).

Notwithstanding NCA licensing, third-country branches are not allowed to provide cross-border services to other Member States, unless it is intragroup or by way of reverse solicitation, as there is no EU passport for branches. This makes it rather impractical compared to a duly licensed EU subsidiary that is passport-eligible.

12. What are the future categories of third-country branches?

To reflect proportionality, the CRD VI categorises third-country branches into two classes (class 1 and class 2) based on the size, nature and scope of their business. This is similar to the categorisation of MiFID investment firms (where there are three classes).

Class 1 branches are, for example, those for which the locally booked assets in the previous year amount to EUR 5 billion or more or which accept retail deposits that make up at least 5% of total liabilities or exceed a total of EUR 50 million. A class 1 branch is not a qualifying branch (see below). All others are categorised as class 2 branches, which are subject to less strict regulatory requirements.

In case of equivalence of a third country determined by the European Commission, branches whose head office is located in such an equivalent country would be categorised as qualifying branches and automatically fall into class 2.

13. What does "subsidiarisation" mean?

The CRD VI provides that NCAs may require third-country branches in their Member State to "subsidiarise" (as a last resort), i.e. to apply for a banking licence as a subsidiary.

This is to be done in particular if the branch (i) provides prohibited cross-border services, (ii) is classified as systemically important, (iii) the total amount of assets of a third-country group within the EU is at least EUR 40 billion, or (iv) the amount of assets of the branch in the relevant Member State is at least EUR 10 billion.

14. What are the ongoing prudential and compliance obligations for third-country branches?

The CRD VI sets a number of requirements for third-country branches in a staggered approach in line with the two classes introduced. These include, in particular, capital, liquidity, internal governance, outsourcing management, booking and record-keeping requirements as well as reporting obligations.

The requirements in CRD VI only form the minimum floor. Each Member State may impose even stricter requirements.

All of this, combined with the non-passport-ability, makes a third-country branch rather impractical compared to a duly licensed EU subsidiary.