Response to consultation on RTS on methods of prudential consolidation

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Question 1: Are there undertakings which do not comply with the definition of a financial institution or ancillary services undertaking of Regulation (EU) 575/2013 which should be included in the prudential scope of consolidation? Please explain and provide examples of these entities.

The prudential framework should allow for the consolidation of operating lease entities in some circumstances. Alongside the consultation paper, the EBA has published an Opinion and a Report on the prudential treatment of other financial intermediaries (OFIs) and regulatory perimeter issues which recommend clarification of the definition of financial institutions and ancillary services undertakings.

The current framework requires the prudential consolidation of entities that primarily conduct “financial lease” activities while there are diverging interpretations as to whether entities conducting primarily “operating lease” activities under the IFRS accounting framework should be consolidated as “ancillary services entities”.

We agree with the comment in the EBA report that both activities bear very similar features, and that the exclusion of “operating leases” entities from prudential consolidation may, based on the circumstances, not necessarily be desirable. The EBA further mentions that consideration could be given to the circumstances in which an entity engaged in operational leasing could be regarded as an ancillary services undertaking."

The term “ancillary services undertaking” is defined in Article 4(18) of Regulation 575/2013/EU as “an undertaking the principal activity of which consists of owning or managing property, managing data-processing services, or a similar activity which is ancillary to the principal activity of one or more institutions”.

Leasing involves the provision of financing for the acquisition of an asset, as well as the ownership and management of that asset. Given the importance of the financing dimension of leasing, leasing is a direct extension of the traditional banking activities which consists of the provision of financing to the economy and in practice many large banking groups (including Standard Chartered) have a leasing business.

In our view, undertakings conducting operating lease activities meet the definition of “ancillary services undertaking” when the activity is conducted as part of the group’s product offering, as an activity supporting and complementing the main activity of the banking group, i.e. the provision of financing to the economy. Such undertakings should not be consolidated however when the undertakings are short-term investments (e.g. private equity investments or holdings acquired through the realisation of collateral following a default), i.e. when the holding is not aligned with firm’s longer-term strategic ambitions."

Question 2: Do you consider SSPEs financial institutions? When SSPEs are consolidated for accounting purposes, do you also consolidate them for prudential purposes? Please differentiate in your answer between the situation when SRT is met and when it is not met (the institution originates the securitisation); and when the institution acts as an investor on the securitisation vehicle (whether this is a SSPEs or a special purpose entity used to set up securitisations) or sponsors the securitisation transaction.

Yes, Standard Chartered considers SSPEs as financial institutions. Standard Chartered consolidates for prudential purposes all undertakings (including special purpose vehicles (SPVs) and securitisation special purpose entities (SSPEs)) to which the Group exercises control as per the accounting framework, to the extent that these undertakings invest in financial assets.

We consider, however, that in the securitisation framework significant risk transfer (SRT) drives the consolidation treatment of SSPEs. For instance, when a bank originates a traditional securitisation transaction and SRT is achieved, risk-weighted assets are computed on the retained exposures to the SSPE and not on the SSPE underlying assets. In effect, this is equivalent to non-consolidating the SSPE.

Question 3: Do you currently use the method of proportional consolidation for the consolidation of subsidiaries in accordance with Article 18(2) of Regulation (EU) No 575/2013? If proportional consolidation is used, please explain if the conditions included in Consultation Paper are met.

No, Standard Chartered fully consolidates subsidiaries which are either institutions, financial institutions or ancillary services entities.

Question 4: Do you have any comment on the conditions established in this Consultation Paper to apply proportional consolidation pursuant to Article 18(2) of Regulation (EU) No 575/2013?

No comments.

Question 5: Do you agree on the criteria for the determination of the consolidating entity? Do you experience a different situation currently?

No comments.

Question 6: Do you have any comment on the elements included in this Consultation Paper for the application of the ‘aggregation method’ pursuant to Articles 18(3) and (6)(b) of Regulation (EU) No 575/2013? Please explain.

No comments.

Question 7: Do you have any comment on the application of proportional consolidation according to Article 18(4) of Regulation (EU) No 575/2013?

The draft RTS requires that undertakings proportionally consolidated pursuant to CRR Art. 18(4) should meet the IFRS 11 definition of joint arrangements.

We agree with the requirement for CRR Art. 18(4) undertakings to meet the IFRS 11 definition of joint arrangement. In practice, all Standard Chartered undertakings proportionally consolidated for prudential purposes are joint-ventures for accounting purposes.

Question 8: Do you have any comment on the criteria established in this Consultation Paper on the prudential treatment of other participations or capital ties (including the equity method) under Article 18(5) of Regulation (EU) No 575/2013? Please explain.

The draft RTS introduces criteria which competent authorities should consider when determining the prudential consolidation treatment of undertakings other than subsidiaries (CRR Art. 18(1)) and joint-ventures (CRR Art. 18(4)).

We note that Art. 11(4) of the draft RTS limits proportional consolidation under CRR Art. 18(5) to instances where:

- an undertaking is owned by several institutions acting jointly without unanimous consent required with regard to the management and operation of the undertaking and with an agreement between shareholders to support it jointly; or

- there is strong evidence that the institutions will support the relevant undertakings in proportion to their investments.

Proportional consolidation under CRR Art. 18(5) should not be limited to undertakings owned by several institutions. We understand from the EBA’s Public Hearing that it is not the intention of the EBA to introduce such a restriction. Instead, the term “institutions” should be replaced by “shareholders” to allow for the proportional consolidation of undertakings co-owned with other financial shareholders (e.g. insurance companies) or even non-financial shareholders.

Question 9: Do you agree with the impact assessment and its conclusions? Please provide any additional information regarding the costs and benefits from the application of these draft RTS.

No comments.

Question 10: Please provide any additional comments on the Consultation Paper.

No comments.

Name of organisation

Standard Chartered