Are minority interests that arise from a bank subsidiary (as in the example), which are indirectly attributable to third parties, eligible at the EU parent consolidated level?
The question is related to the case of an EU parent company that has a stake of 51% in a holding company in a third country, which is not referred to in Article 81(1) of the Regulation, and where a local partner owns the remaining stake (49%) in the holding company, but control is exercised by the EU parent company.
The holding company has in turn a 100% stake in a bank subsidiary in the same third country. This subsidiary is referred to in Article 81(1) of the Regulation. In addition, both the bank subsidiary and the holding company are fully included in the prudential consolidation of the EU parent company.
The own funds of the bank subsidiary, which amounts to 1000, are mainly compounded by capital and accumulated reserves and account for local capital requirements. The holding company balance sheet is composed of the participation in the bank subsidiary and some liquidity.
For the EU Parent company, the amount of the indirect minority interests that arise from the bank subsidiary are equal to the local partner’s share in the bank subsidiary, multiplied by the own funds of the subsidiary. (Indirect minority interest = 49% *100%*1000= 490).
Minority interests are defined in Article 4(1)(120) of the CRR as the amount of Common capital tier 1 capital of a subsidiary of an institution that is attributable to natural or legal persons other than those included in the prudential scope of consolidation of the institution.
According to Article 81 the minority interest, as previously defined, arising from the participation in bank subsidiaries in third countries, which are fully included in the consolidation ,and owned by third parties should be included in the consolidated own funds.
From those articles, it is clear that:
• Those minority interests arise from that bank subsidiary.
• The CRR in Article 4(1)(120) when defining the term “minority interest” does consider the amount of the instruments “attributable” to third parties, and in this sense, both direct and indirect minority interests are considered within the definition of the term minority interest.
• The “attributable amount” comprises capital and reserves (CET1 capital) that have been accumulated in the bank subsidiary and that belong to third parties beyond the scope of the consolidation.
• The CET1 capital is allocated at the bank subsidiary. This CET1 capital is funding the bank subsidiary’s RWA, and accounts for local solvency requirements that are under the supervision of the bank subsidiary supervisor. In addition to this, the bank subsidiary’s RWA are considered in the group’s consolidated accounts.
According to Article 4(1)(120) of Regulation (EU) No 575/2013 (CRR), 'minority interest means the amount of Common Equity Tier 1 capital of a subsidiary of an institution that is attributable to natural or legal persons other than those included in the prudential scope of consolidation of the institution.'
Article 4(1)(16), 2nd sub-paragraph also defines
clarifies that "subsidiaries of subsidiaries shall also are to be considered to be subsidiaries of the undertaking that is their original parent undertaking".
Further to Article 81(1) of the CRR, Article 34a(6) of the Delegated Regulation (EU) No 241/2014 of 7 January 2014 (RTS on Own funds
requirements for institutions) clarifies that, 'where a parent institution has an intermediate subsidiary which is not referred to in Article 81(1) of Regulation (EU) No 575/2013 and where this intermediate subsidiary itself has subsidiaries which are referred to in Article 81(1) of that Regulation, the parent institution may include in its Common Equity Tier 1 capital the amount of minority interest arising from those subsidiaries calculated according to Article 84(1) of that Regulation. The parent institution cannot, however, include in its Common Equity Tier 1 capital any minority interests arising from an intermediate subsidiary which is not referred to in Article 81(1) of Regulation (EU) No 575/2013.'
for the case at hand, the parent institution can not include in its consolidated CET1 the amount of minority interests arising from the intermediate holding company only if as it does not meets all the conditions of Article 81(1) of the CRR, including point (a)(iii) of this Article. No minority interest arises from the banking subsidiary of the intermediate holding company, as the banking subsidiary is owned 100% by the intermediate holding company and no ‘indirect minority interest’ exist.
Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).