In the example below, are the minority interests of 20% in (mixed) financial holding company no. 1 – after applying the deductions according to Article 84 CRR – eligible for the consolidated own funds of the group?

The parent company of a credit institution is (mixed) financial holding company no. 1 and the parent company of this (mixed) financial holding company no. 1 is (mixed) financial holding company no 2. Thereby, (mixed) financial holding company no. 2 owns 80% in (mixed) financial holding company no. 1. The institution and both (mixed) financial holding companies are located in the same Member State and are subject to Articles 11 and 18 CRR. The minority interests are pari-passu to the majority interests and are available to cover losses at the level of (mixed) financial holding company no. 1.

Article 81 CRR defines minority interests as comprising the sum of Common Equity Tier 1 instruments, the share premium accounts related to those instruments, retained earnings and other reserves of a subsidiary, provided this subsidiary is an institution or an undertaking subject by virtue of applicable national law to the requirements of the CRR and CRD IV, and subject to full inclusion in prudential consolidation.

Is a (mixed) financial holding company considered as being a company according to Article 81(1)( a)(ii) CRR? We are not sure what is meant “by virtue of national law” as a (mixed) financial holding company is subject to the CRR prudential consolidation rules by virtue of the CRR.

Recital 38 of the CRR is supporting our view: The minority interests arising from intermediate financial holding companies that are subject to the requirements of this Regulation on a sub-consolidated basis may also be eligible, within the relevant limits, as Common Equity Tier 1 capital of the group on a consolidated basis, as the Common Equity Tier 1 capital of an intermediate financial holding company attributable to minority interests and the part of that same capital attributable to the parent company support both pari passu the losses of their subsidiaries when they occur.

Please also see the CP ECB Guide on options and discretions available in Union law (chapter 2 Own Funds – para 11): “MINORITY INTERESTS INCLUDED IN CONSOLIDATED COMMON EQUITY TIER 1 CAPITAL (Article 84 of the CRR)/ The ECB considers that it is appropriate to apply Article 84(1) of the CRR to a parent financial holding company of a credit institution in all cases, in order to ensure that only that part of the consolidated own funds that is promptly available to cover losses at the parent level is included in the regulatory capital.”

Among the conditions for the recognition of minority interests at consolidated level, Article 81(1)(a) of the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (“CRR”) establishes that minority interests shall comprise the sum of Common Equity Tier 1 items instruments, the share premium accounts related to those instruments, retained earnings and other reserves of a subsidiary when the subsidiary is (i) an institution or (ii) an undertaking that is subject by virtue of applicable national law to the requirements of the CRR and Directive 2013/36/EU (“CRD IV”), or iii) an intermediate financial holding company in a third country that is subject to prudential requirements as stringent as those applied to credit institutions of that third country and where the Commission has decided in accordance with Article 107(4) CRR that those prudential requirements are at least equivalent to those of the CRR.

Under the CRR, (mixed) financial holding companies are not subject to the CRR requirements on a solo basis. However, in the case at hand, if the undertaking (mixed) intermediate financial holding company) No 1 (referred to in the background of this question) is subject to CRR prudential requirements on a  sub-consolidated basis, then the conditions of Article 81(1)(a)(ii) CRR would be met. Consequently, the minority interests arising from the intermediate (mixed) financial holding company No 1 could be calculated according to Article 84 of the CRR  included on a sub-consolidated basis and be included in the consolidated own funds at the level of the (mixed) financial holding company No 2. calculated according to Article 84 of that Regulation.

Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).