Question ID
2015_1974
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Large exposures
Article
4
Paragraph
1 (39)
Subparagraph
last subparagraph
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
n.a.
Name of institution / submitter
BaFin
Country of incorporation / residence
Germany
Type of submitter
Competent authority
Subject matter
“Direct” control
Question

In the example stipulated in the background section, does Central Government A - even if it does not hold the voting rights over company B1 directly by itself - exercise "direct" control over B1 within the meaning of Article 4 (1) (39) last subparagraph CRR?

Background on the question
Case: Central government A holds 100% of the capital of a holding company B. The members of the Board of Directors of B are appointed by A. Hence, A controls B, see Article 4(1)(37)CRR. B is legally required to contribute to a capital increase in company B1. A provides the financial resources to B. B executes this mission in its own name but on behalf and at risk of A ( "delegated mission") following the instructions of A (comparable with a trustee for A). B transfers dividends, if any, to A. Therefore, B presents this investment separately in its accounts and does not include it in its balance sheet. After the transaction, B holds 50,02% of the voting rights of B1. Starting with the legal background, Article 4(1)(39) last subparagraph CRR allows for a preferential forming of a group of connected clients in the context of a central government and its state owned entities. Instead of forming one comprehensive group of connected clients (general rule according to Article 4(1)(39) (a) CRR) an institution may assess the existence of a group of connected clients separately. This means that the institution may form several smaller groups of connected clients instead of only one single comprehensive group. However, Article 4(1)(39) last subparagraph CRR does not grant a total liberty to the institution. It restricts the separate assessment to the persons "directly" controlled by the central government. Considering the present case, it might be helpful for a better understanding to amend the case with an example illustrating the general rule. Thus, apart from the participation in B1, B also holds the companies B2 and B3. The difference to the holding of B1 is that B does not hold B2 and B3 "in delegated mission" but according to its own investment policy. B holds B2 and B3 in its own name, on its own behalf and at its own risk. The institution has exposures to all entities mentioned. The institution, in a first step, forms one comprehensive group of connected clients according to Article 4(1)(39) (a) CRR (group A including all entities mentioned). In a second step, the institution wishes to carve out B1 because of the "delegated mission" and asks regarding B1 whether it may make use of the exemption according to Article 4(1)(39) last subparagraph CRR. In the case of affirmation this would lead to two distinct groups, i.e. a separate group (group A - B1 including A, B1) and the remaining group (group A including A, B, B2, B3).
Submission date
Final publishing date
Final answer
Having "direct control" requires a relationship between two undertakings or between any natural or legal person and an undertaking that, at the same time:1. meets the criteria in Article 4(1)(37) of Regulation (EU) No 575/2013 (CRR);2. is direct between the two entities considered. In the example, both the relationship between central government A and company B and the relationship between company B and company B1 meet the definition of control, because of meeting the criteria in point (a) or (b), respectively, of Article 22(1) of Directive 2013/34/EU (which has replaced Article 1 of Directive 83/349/EEC). However, the fact that central government A controls company B, which controls company B1 does not lead to "direct control" between central government A and company B1 because the relationship between A and B1 is not direct, irrespective of whether B has the control relationship with B1 on request and at risk of the central government A that controls B. Disclaimer: This question goes beyond matters of consistent and effective application of the regulatory framework. A Directorate General of the Commission (Directorate General for Financial Stability, Financial services and Capital Markets Union) has prepared the answer, albeit that only the Court of Justice of the European Union can provide definitive interpretations of EU legislation. This is an unofficial opinion of that Directorate General, which the European Banking Authority publishes on its behalf. The answers are not binding on the European Commission as an institution. You should be aware that the European Commission could adopt a position different from the one expressed in such Q&As, for instance in infringement proceedings or after a detailed examination of a specific case or on the basis of any new legal or factual elements that may have been brought to its attention.
Status
Final Q&A
Answer prepared by
Answer prepared by the European Commission because it is a matter of interpretation of Union law.
Note to Q&A

Update 26.03.2021: This Q&A has not yet been reviewed by the European Commission in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).

Disclaimer

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