Consider, for example, a branch in the EU or EEA that belongs to an institution that is located outside the EU and EEA. According to the general requirements of Article 47 (1) CRD IV that were transposed by the relevant member state, the branch may have to meet separate CRR own funds requirements. To this end, the institution allocates own funds to the branch. Does the branch have to include its own funds in the overall net foreign-exchange position according to Article 352 (4) CRR, if they are denominated in a currency other than the local currency of the member state where the branch is located?
The question arises in conjunction with branches conducting banking business and being branches of credit institutions having their head office in a third country (non-EU / non-EEA) with a different home currency. These legally dependent branches have been provided with operating capital denominated in the accounting currency of their head office. According to the German Banking Act, these branches are supposed to keep their accounts separately (and thus in Euro) to provide the supervisory authorities e.g. with balance sheet and regulatory information on their business activities. For this purpose, any amount of own funds instruments raised in a currency other than the Euro has to be converted into Euro. Economic perspective - arguments for an exclusion from the overall net foreign-exchange position Own funds instruments, at least those in form of equity and equity-like instruments, are not repayable at a specific amount, i.e. they represent a residual claim on the assets of a credit institution in the reporting currency. In this regard, changing exchange rates do not affect the value of the own funds instrument itself immediately (but only via changes in values of other positions on the asset / liabilities side of the balance sheet – which definitely and directly form part of the net foreign-exchange position in the respective currency). Economic perspective – arguments for an inclusion in the overall net foreign-exchange position On the other side, the credit institutions’ owners granted funds definitely denominated in a currency other than the accounting currency of the credit institution. This state is not changed by the fact that the respective funds have to be converted into another currency fictively. The actual value of the own funds instrument measured in the accounting currency changes whenever the exchange rate changes. Any amount of funds that the institution pays back to its owners (e.g. in case of partial capital decreases) must be earned, raised or converted in foreign currency and is therefore subject to foreign-exchange risk. In this regard, it might make a difference whether the own funds position denominated in a foreign currency is counterbalanced with corresponding lending in foreign currency or not. Legal perspective From a more formal point of view, the net spot position (i.e. all asset items less all liability items (…)) forms part of the foreign-exchange position according to Article 352 (1) a) CRR. “Liabilities” might either be interpreted in a broad sense (i.e. meaning any kind of position accounted for on the liabilities side of the balance sheet) or only in a narrow sense (i.e. liabilities as opposed to equity). The German translation of this paragraph suggests a broad interpretation, i.e. that all elements shown on the liabilities side of the balance sheet shall be included in the net spot position, thus also any kind of own funds instrument
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