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.

Barclays notes the EBA’s opinion and report on regulatory perimeter issues; we agree that the focus should be on ensuring a common understanding of the terms “financial institution” and “ancillary services undertaking” rather than introducing further complexity within the prudential consolidation rules themselves.

We would welcome further guidance on the status of Collective Investment Undertakings (CIUs), including:

• Alternative Investment Funds; and
• Similar vehicles in third countries, such as Investment Act 1940 funds in the United States.

The response to Q&A 2015_2283 stated that UCITS do not meet the definition of a “financial institution” provided they do not pursue one or more of the activities listed in points 2 to 12 and point 15 of Annex I to Directive 2013/36/EU as their principal activities. Implicitly, this also suggests that UCITS would not be deemed to be “financial institutions” by virtue of their primary activity being to “acquire holdings,” even if some or all of the fund’s investments are financial in nature. As a result, we believe CIUs should be excluded from the prudential scope of consolidation, even if they are consolidated for accounting (for example, during a seeding phase).

We note that CIUs fall within the definition of an “intermediate entity” per Regulation (EU) 2015/923, and hence positions on a CIU’s own balance sheet may still give rise to deductions from capital for the investors, even when the CIU is not consolidated for prudential purposes.

In respect of “ancillary services undertakings,” we would encourage the EBA to focus on situations which are direct extensions of a bank’s operations – for example, entities which own, manage or lease the properties from which a bank and its group companies operate. We would distinguish this from situations where an interest in a vehicle owning real estate is acquired as a result of credit operations and managed on an arms-length basis, often by expert managers hired in by the bank, in order to recover the loan value. We would observe that prudential consolidation of such investments, which may involve relatively complex holding structures, is not the only available means for reflecting their risk: it may be simpler and more effective to simply risk weight the amount of the bank’s capital at risk, similar to the approach for venture capital investments in CRR Article 128.

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.

We consider that the definition of SSPE in CRR Article 4(1)(66) exists in parallel to the concept of a “financial institution,” rather than as a subset of that definition. An SSPE does not pursue one or more of the activities listed in points 2 to 12 and point 15 of Annex I to Directive 2013/36/EU as its principal activity, nor (we would contend) is its primary activity to “acquire holdings.” However, we believe we can only definitively apply the SSPE definition in the following circumstances:

• Traditional securitisations, within the meaning of CRR Article 244(2), where the bank is the originator and has achieved and continues to achieve SRT; or
• Asset-backed commercial paper programmes where the bank fulfils the role of sponsor.

In other words, these represent situations where we are the party undertaking or facilitating the securitisation, but where CRR allows us to hold RWAs for the securitisation positions retained by the bank following the transaction. In such circumstances, the SSPE is excluded from prudential consolidation as the risks associated with the bank’s ongoing exposure are appropriately capitalised through the securitisation framework, even if the vehicle is consolidated for accounting purposes.

We would not apply the SSPE definition to funding securitisations, where asset-backed securities are created for use as collateral without the intention of transferring risk outside of the bank’s group. Similarly, we do not treat our covered bond issuing vehicles as SSPEs. Any legal entities used in funding securitisations or covered bond issuance are viewed as financial institutions and are subject to prudential consolidation in the normal manner. In principle, any own-originated traditional securitisation that did not achieve SRT would be treated in the same way.

Barclays also uses dedicated vehicles to facilitate its synthetic securitisation activity, primarily to manage collateral received from the external protection providers. We treat these as financial institutions within the scope of prudential consolidation, even where the synthetic securitisation achieves SRT.

Where Barclays is solely acting as investor in a securitisation, rather than as originator or sponsor, we treat the issuing vehicle as a financial institution subject to prudential consolidation rules in the normal manner.

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.

Since June 2017, with the agreement of the UK PRA, Barclays has applied proportional rather than full consolidation to its interest in Barclays Africa Group Limited (BAGL). This followed a planned sell-down of our shareholding from the original level of 62% to c.15%. Ultimately, Barclays expects to remove BAGL from the scope of prudential consolidation.

While we assessed the position following the sell-down under CRR Article 18(4), the UK PRA also considered the relevance of CRR Article 18(2) when agreeing to the change of treatment. BAGL is now treated as an Available For Sale investment for accounting purposes, rather than as a subsidiary. But we discussed with PRA whether certain protective rights enjoyed by Barclays could amount to “dominant influence,” meaning BAGL could still be deemed a subsidiary within the meaning of CRR Article 4(1)(16).

If BAGL was treated under CRR Article 18(2) then it would not meet the following conditions set out in the Consultation Paper:

Article 5(1)(c): The contract shall clarify that any changes in the share of capital of the shareholders or the members are subject to the explicit consent of all the shareholders or members.

Changes to the share capital of the shareholders require a voting majority among the shareholders, not the explicit consent of all the shareholders. Hence Barclays as a minority shareholder could be outvoted. However, this could not result in Barclays incurring losses or additional liabilities in excess of its shareholding.

It is not necessary to ensure unanimous consent in order to prevent the bank from being exposed to losses beyond its shareholding.

Article 5(1)(d): The contract shall specify that should the subsidiary be recapitalised, institutions shall [on a] timely [basis] inform the competent authority about the progress made in the recapitalisation process. Each shareholder or member shall contribute to the recapitalisation in proportion to its current share of the capital of the subsidiary.

Shareholders are under no obligation to recapitalise the entity; any participation by Barclays in a recapitalisation would be voluntary and not in greater proportion than our shareholding.

We believe the proposed condition contravenes the requirement in CRR Article 18(2) that the liability of the parent is limited to the share of capital held. We read the CRR provision as an absolute restriction rather than a relative restriction.

Article 7(2): The other shareholders or members shall be financial sector entities subject to prudential supervision and shall [fulfil] the criteria of financial soundness as set in Article 23(1) of the Directive 2013/36/EU on an on-going basis.

BAGL is a publically-listed company whose shares can be freely bought and sold. Major institutional shareholders include pension funds that would not meet the definition of “financial sector entities subject to prudential supervision.”

It is not necessary to restrict the shareholder base to regulated firms, provided that the firm itself is under no compulsion to support the entity or incur losses out of proportion to its shareholding.

We would expect that other conditions set out in the CP would be met via the existing Articles of Association of the company, rather than by means of a separate contract, given that the shares are listed and freely traded.

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?

Barclays agrees with the EBA’s observations that CRR Article 18(2) is not widely deployed at present. We note it has potential as a powerful tool to diversify sources of capital for cross-border banking groups with multiple operating entities, or groups that are otherwise subject to structural separation measures.

The current framework effectively creates a cliff-edge, whereby a marginal move to majority control of an institution or financial institution (from a participating interest to a subsidiary) automatically brings in 100% of the associated prudential obligations. Previously, the recognition of minority interest capital at the consolidated level provided a counterbalance to this effect. However, the Basel III reforms as implemented though CRR Articles 81-88 impose severe limitations on the recognition of MI capital. While we understand this was partly a response to abusive structuring by some banks, there are some perverse effects:

• Intermediate holding companies outside of the EU do not currently qualify as issuers of MI under CRR Article 81, even if they are subject to prudential supervision on a consolidated basis.
• Qualifying MI is limited to amounts needed to exactly meet the lower of any local capital requirements or the entity’s contribution to consolidated requirements. This imposes penalties for operating any level of management buffer, or for being subject to different buffers at the group vs solo entity level.

In effect, this creates incentives for an ‘all or nothing’ approach, whereby subsidiaries are 100% owned and reliant on the parent for capital, or investments are reduced to a level where they do not qualify as subsidiaries. Any intermediate position imposes inefficiencies at the consolidated level. This is particularly salient for activity in emerging market jurisdictions, where ceilings can be imposed on the level of foreign ownership. CRR Article 18(2) offers an alternative path where, subject to appropriate supervisory scrutiny, the regulatory obligations subject to consolidation can be more reflective of the actual level of capital at risk.

As per our response to Question 3, we believe the conditions should not impose any obligation on banks to recapitalise subsidiaries. We believe the focus should be on ensuring that other shareholders cannot use their voting power to increase the share of losses borne by the bank or impose additional obligations on the bank.

We would suggest requirements relating to the solvency of other shareholders need to be evaluated in conjunction with the step-in risk factors in Article 11(5) of the Consultation Paper, rather than requiring all shareholders to be prudentially-regulated entities. The solvency of other shareholders does not affect the strict liability of shareholders or the allocation of losses, but we recognise that there may be an increased expectation of non-contractual support from a large shareholder in certain circumstances. The test should be whether there is an incentive for support in excess of the bank’s relative shareholding, such that proportional consolidation is not an appropriately prudent treatment. To this end, we would suggest that a bank applying CRR Article 18(2) is required to make a statement publically and to the regulatory authorities (including those supervising the subsidiary, where applicable) that:

1. The bank does not intend to increase its relative shareholding in the subsidiary.
2. To the extent that bank voluntarily agrees to participate in any subsequent recapitalisation of the subsidiary, it will only do so to the extent of its current relative shareholding.
3. Any other exposures to or agreements with the subsidiary will be on arm’s-length terms.

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

Barclays agrees with the proposed criteria. Currently, all EU-incorporated institutions within the Barclays PLC group are consolidated on the basis of CRR Article 18(1), rather than CRR Articles 18(3) or (6)(b).

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.

Barclays does not have specific comments, the approach seems reasonable. Currently, all entities included within the scope of prudential consolidation by Barclays are on the basis of common control.

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

While Barclays applies CRR Article 18(4) to some situations involving joint control, we do not view the requirements in relation to the management of the entity as relating exclusively to situations where there is an explicit joint arrangement. Our position is that CRR Article 18(4) should also apply in cases where a bank has a participating interest rather than a subsidiary relationship, and the bank is not uniquely responsible for the entity’s management. For example, this would include minority holdings in other financial services groups that are self-managing. While it appears that EBA has made provisions for such arrangements through Article 11(4) of the Consultation Paper, it is not self-evident to us why:

• proportional consolidation is presented here as a supervisory option rather than an approach that should be applied consistently; and
• the expectations regarding the level of ongoing capital support, including with respect to any future recapitalisation, appear more onerous than for a joint control arrangement.

That said, it is not clear whether the “legally enforceable contract” referenced in Article 10(1)(d) is subject to the same conditions as in Article 5. If this is the intention, our comments in response to Questions 3 and 4 also apply here.

In addition, a legally enforceable contract should not be the only means of demonstrating limited liability. The condition should permit other legally binding means of establishing limited liability, such as by way of statutory provisions.

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.

Our main concern is the lack of clarity regarding the scope of these provisions. While “participation” is defined in CRR Article 4(1)(35), “other capital ties” is not defined. It’s therefore unclear on what basis a bank should initiate dialogue with its supervisor regarding the presence or otherwise of step-in risk factors. At the extreme, it could mean any holding of a capital instrument, however immaterial or transitory, thereby placing a disproportionate administrative burden on banks and their supervisors. Barclays would suggest that, for these purposes, “other capital ties” should mean a significant investment in a financial sector entity as defined by CRR Article 43, unless:

• the entity would otherwise meet the terms of CRR Article 19(1); or
• the bank chooses to apply full consolidation of the entity.

At a minimum, we would suggest that holdings of capital instruments in the trading book should be carved out from this assessment. But we would prefer a more general threshold to address other non-significant holdings of capital that will arise routinely in the banking book – for example, those arising from our financial technology accelerator programme ( or through warrants granted to us by customers as part of a lending relationship.

As stated in our response to Question 7, we believe that proportional consolidation should be the default assumption for participating interests. In effect, we suspect that cases of banks having investments that are large enough to qualify as participations, but without exposure to step-in risk, are likely to be a null set.

The technical standard should provide a clearer framework for supervisors to differentiate between individual cases where full consolidation, proportional consolidation or treating the investment as a capital holding should be applied. We note, for example, that the current UK PRA implementation requires full consolidation in all cases subject to CRR Article 18(5) (see rule 2.3, We would suggest the following approach:

Step-in risk factors: Absent or fully mitigated; Non-contractual support: None
- Significant investments that are not participating interests: treat as Capital holding
- participating interests: Proportional consolidation of the entity

Step-in risk factors: Present or partially mitigated;Non-contractual support: Voluntary, and never in excess of relative shareholding in the entity
- Significant investments that are not participating interests: Proportional consolidation of the entity
- participating interests: Proportional consolidation of the entity

Step-in risk factors: Present or partially mitigated;Non-contractual support: Involuntary and/or uncapped
- Significant investments that are not participating interests: Full consolidation of the entity
- participating interests: Full consolidation of the entity

Where step-in risk factors exist but the bank wishes to apply proportional consolidation, we would suggest that the bank should be required to make a statement to the regulatory authorities (including those supervising the entity, where applicable), that:

1. The bank does not intend to increase its relative shareholding in the entity.
2. To the extent that bank voluntarily agrees to participate in any subsequent recapitalisation of the entity, it will only do so to the extent of its current relative shareholding.
3. Any other exposures to or agreements with the entity will be on arm’s-length terms.

If the bank is not able to make the statement then full consolidation would apply. Similar to the approach on implicit support in CRR Article 248, if a bank had demonstrably acted contrary to its previous statements in this regard then the supervisor could require full consolidation.

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.

We agree with the impact assessment and its general conclusions, noting that the impact on individual banking groups will vary.

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

We would suggest the text of Article 12 is clarified such that supervisors may consider mitigation of factors described in (1), in the same way as for the step-in risk under Article 11(6). For example, the presence of a representative on the Board may not amount to significant influence depending on the composition of the Board; similarly, an agreement to interchange personnel or share technical experience in discrete areas should not automatically imply a need for consolidation.

Name of organisation

Barclays PLC