CRD VI and Cross-Border Banking Transactions

CRD VI forms part of the EU’s second banking package. In addition to the further transposition of the international Basel III standards into European law – particularly through more stringent requirements on capital, risk management and disclosure – it strengthens governance and fit-and-proper standards as well as supervisory intervention powers, including in relation to ESG risks and macro-prudential measures. A key feature is the harmonisation of the supervisory framework for branches of third-country banks with the aim of ensuring a uniform regime for access to the European Economic Area (EEA). It thus focuses mainly on the future regulation of cross-border banking via third-country branches (TCBs).

Why Harmonisation?

Third-country branches – that is, branches of credit institutions headquartered outside the EEA – are to be clearly distinguished from branches established in other EEA countries. The latter benefit from the European Passport and are subject primarily to home-country supervision, whereas TCBs are subject to the supervision of the host country. To date, no European harmonisation has existed, except for the basic requirement that TCBs must not be treated more favourably than passported branches.

In practice, however, supervisory approaches varied widely. In Germany, TCBs were regulated almost as if they were standalone credit institutions, whereas in jurisdictions such as Hungary or Belgium the requirements were much less strict. For example, the own funds of the parent institution abroad could be used to support substantial lending activity. This resulted in competitive advantages and disadvantages across jurisdictions and opened the door to supervisory arbitrage – a kind of ‘light-touch regulatory competition’ within banking supervision.

The idea of a passporting regime for TCBs – a primary branch with further outlets across the EU modelled on fully licensed EU banks – was quickly rejected. Neither the Commission, Parliament, or Council considered it wise to grant legally dependent entities of third-country banks the same internal market rights as EU institutions.

Instead, a consistent pattern of ‘passport mimicry’ avoidance emerged. Supervisory authorities, led by the ECB, warned against a network of national branches that could in practice replicate the access rights of a European Passport without being subject to the stringent own funds, liquidity and resolution requirements applicable to subsidiaries. In short: the aim was a genuine, functioning internal market, not just a make-believe one.

The experiences of Brexit and the EBA’s 2021 report highlighted just how disparate the rules on TCBs were – and how easily location competition with regulatory means and for regulatory purposes could arise. CRD VI now draws a clear line: (i) no cross-border activities from a branch, (ii) EU-wide minimum standards, and (iii) mandatory conversion into a fully licensed EU subsidiary in cases where systemic importance exists. Member States retain the discretion to impose stricter requirements (‘gold-plating’), leaving room for more stringent supervisory traditions.

Implications for German Third-Country Branches

Although the implementing legislation is still in the preparatory stages, the sector is already analysing potential consequences. Two key questions arise: Do German TCBs face less implementation effort than those in other Member States? And what are the implications of a restrictive interpretation of reverse solicitation?

Implementation Effort in Germany

Since the Banking Act (KWG) of 1961, TCBs in Germany – apart from a few exceptions – have long been subject to requirements largely equivalent to those applicable to standalone credit institutions. Elsewhere, the regulatory framework has been far more permissive. As a result, future competitive advantages in those jurisdictions may disappear, potentially calling into question the viability of individual TCBs.

For German TCBs, by contrast, what was previously a competitive disadvantage could become a location advantage. The CRD VI minimum standards are, in most cases, already exceeded in Germany. That means that, compared with Member States with lighter regimes, German institutions are likely to face a lower incremental adjustment burden.

That said, the new framework will not leave German TCBs entirely unaffected. Among other requirements, the following will now apply uniformly: (i) a new authorisation process under the implementing legislation, (ii) additional reporting obligations, and (iii) adjustments in relation to resolution capital.

Reverse Solicitation

One of the few remaining exceptions that continues to let banking business from third countries into the EEA is reverse solicitation – that is, where the client starts the business relationship entirely on their own initiative. Since Brexit, supervisory authorities have taken a markedly stricter stance, permitting such approach but only as a rare exception – as it where on a con moderazione basis.

CRD VI requires TCBs to report the volume of such transactions with EU borrowers regularly to supervisors – a task that, in practice, usually only the parent institution can perform given that the local branch rarely has the full picture.

Many details remain unresolved. For example, if a German TCB participates in a syndicated loan for a client located in another Member State, a restrictive interpretation could mean that no reverse solicitation exists – and that the transaction would be prohibited in future. Whether this is the supervisory intention remains to be seen. Regulatory Technical Standards to be developed by the EBA are expected to bring clarification.

The German BRUBEG draft makes the German exemptions under section 2(4) and (5) of the KWG conditional on compatibility with European law, thereby delegating interpretative authority – at least technically – to the EBA.

Outlook

The BRUBEG draft addresses the new TCB regime in section 40 of Article 2, introducing new sections 53c to 53cq into the KWG. For third-country banking groups, it will generally become more onerous to operate in Europe. However, Germany may benefit in the competition for location thanks to its already stringent standards. In any event, CRD VI is forcing banks to reassess their presence within the EEA. And this in turn is prompting a strategic repositioning.