EBA consults on group financial support

The EBA launched today a consultation on draft Regulatory Technical Standards (RTS) and Guidelines specifying the various conditions for the provision of group financial support, and on draft Implementing Technical Standards (ITS) on the disclosure of group financial support agreements. These Technical Standards and Guidelines have been developed within the framework established by the Bank Recovery and Resolution Directive (BRRD) and aim at strengthening integrated risk management by removing possible uncertainties around supporting entities in distress within the same group. The consultation runs until 4 January 2015.

Group financial support refers to one entity of a banking group providing support to another entity of the same group on the basis of a financial support agreement, provided the latter entity encounters financial difficulties and meets the conditions the BRRD requires for early intervention measures by the competent authority.

The legal framework for financial support within a group is widely different across the EU countries, in particular if the group is in financial difficulties and with regard to support from a subsidiary to a parent company (upstream support). This makes it difficult for cross border groups in financial distress to allocate and manage liquidity optimally, meaning that although the group as a whole has sufficient resources, individual entities may be at risk of failure. Therefore, uncertainties around conditions and resources for supporting the group entity in distress and excessive constraints can ultimately result in a destabilisation of the whole group.

The purpose of the proposed RTS and Guidelines is to establish a clear harmonised legal framework to facilitate group support and to enhance legal certainty by overcoming existing legal obstacles. They ensure that competent authorities of the providing entity grant the authorisation to the support on the basis of a number of conditions: the interest of the group as a whole and the risks which would materialise for the providing entity if the support was not provided; the expected success of the support, the terms of the support (and various prudential requirements applying to the providing entity), the possible impact on financial stability and the resolvability of the providing entity.

Moreover, the draft RTS and Guidelines require authorities and institutions to consider the possible reasons for the financial distress of the institution concerned, including their business model, the current market situation and potential further adverse developments. Whether the above conditions are fulfilled must be assessed based on a description and a projection of the capital and liquidity situation, as well as the needs of the receiving entity, also on the basis of the information provided by the competent authority of the latter.

In the ITS on the form and content of the disclosure of public support agreements the EBA ensures a high standard of transparency with regard to support agreements. So creditors of the group are in the position to make informed investment decisions and assess the consequences of the agreement on individual subsidiaries and the group as a whole.

A public hearing will then take place at the EBA premises on 8 December 2014 from 14:00 to 16:30 UK time.

Legal basis and next steps

The draft RTS and Guidelines have been developed according to Article 23 of BRRD (Directive 2014/59/EU), which mandates the EBA to specify the conditions for the provision of group financial support. The draft ITS are based on Article 26 of the BRRD, which mandates the EBA to specify the format and content of the disclosure of group financial support agreements.