Response to consultation on Guidelines on third country branches capital endowment requirement
Q1. Do you consider the described requirements that capital endowment instruments should meet appropriate to ensure that they are available for use in the case of resolution of the TCB and for the purposes of the winding-up of the TCB? Is there any further requirement the EBA should consider adding? Or alternatively removing?
We believe that requiring TCBs to encumber assets that would otherwise qualify as liquid for the purpose of meeting the capital endowment obligation imposes an undue burden on them, for the following reasons:
(i) This requirement does not apply to credit institutions established within the EU, making its exclusive application to TCBs inequitable. Moreover, it is unclear how restricting the usability of liquid assets enhances the resolution capacity of TCBs, which are already subject to the TLAC requirements at the group level.
(ii) Depositors of TBCs are already protected under the Deposit Guarantee Scheme (DGS), with coverage limits determined by policymakers. Given that the intent of the capital endowment requirement is to protect depositors, this objective is already addressed through the existing DGS framework.
(iii) Loss-absorbing requirements are typically applied to the liability side of the balance sheet, not the asset side—TLAC being a prime example. Accordingly, TCBs already comply with these requirements through their group’s TLAC requirements.
In light of the above, we respectfully request that the EBA treat assets held in escrow accounts under the capital endowment requirement as unencumbered for liquidity purposes.
Furthermore, given that the purpose of the capital endowment requirement is to protect depositors, we respectfully request further clarification on the scope of liabilities included in the calculation of the TCB capital endowment. Specifically, we consider that the following liabilities should be excluded:
- Intragroup borrowing, as it does not pose a risk of loss to customers.
- Market-oriented instruments such as CDs, CPs, and bonds, as professional investors are expected to fully understand their risk profiles.
Additionally, we believe that deposits maturing within 30 days should also be excluded, depending on the outflow rates applied in the liquidity coverage ratio (LCR) requirement. This is because the expected outflow in the LCR is already held as high-quality liquid assets to meet the LCR requirement. Deposits included in the liabilities used to calculate the capital endowment requirement should be those remaining after applying the outflow rates under the LCR requirement.
Q2. Do you consider the list of instruments proposed for the purposes of Article 48e(2)(c) of Directive 2013/36/EU adequate? Is there any further instrument the EBA should consider adding? Or alternatively removing?
We welcome the inclusion in paragraph 12(c) of the draft GL of debt securities issued or guaranteed by non-EU governments or central banks, provided they meet supervisory and regulatory equivalence and qualify for a 0% risk weight under Articles 114(7) and 115(4) of Regulation (EU) 575/2013.
This flexibility is essential for third-country banks and allows for efficient use of group resources.
However, the current drafting may, in practice, preclude the use of non-EU government bonds in many cases due to the strict conditions under Article 114(7) of the CRR, particularly the requirement that the TCB be funded in the domestic currency of the issuing country.
We therefore respectfully request that the EBA clarify in the draft GL that TCBs, being part of the same legal entity as the head undertaking, can be considered as funded in the domestic currency of the head undertaking. This would facilitate the appropriate use of group resources and enhance the effectiveness and flexibility of the capital endowment requirement.