What is the correct application of Article 22 CRR on financial holding companies and what is the interaction between Article 22 CRR and Article 21a CRD, for (mixed) financial holding companies?

Pursuant to Article 22(1) CRR, as amended by the Corrigendum of 11.11.2021, “Subsidiary institutions shall apply the requirements laid down in Articles 89, 90 and 91 and Parts Three, Four and Seven and the associated reporting requirements laid down in Part Seven A on the basis of their sub-consolidated situation if those institutions, or their parent undertaking where the parent undertaking is a financial holding company or mixed financial holding company, have an institution or a financial institution as a subsidiary in a third country, or hold a participation in such an undertaking”.

The CRR, as amended by Regulation 2019/2033, defines the term “institution” in point 3 of Article 4(1) as “a credit institution authorised under Article 8 of Directive 2013/36/EU or an undertaking as referred to in Article 8a(3) thereof”.

Article 3(3) CRD further adds that “in order to ensure that requirements or supervisory powers laid down in this Directive or in Regulation (EU) No 575/2013 apply on a consolidated or sub-consolidated basis in accordance with this Directive and that Regulation, the terms ‘institution’, ‘parent institution in a Member State’, ‘EU parent institution’ and ‘parent undertaking’ shall also include: a) financial holding companies and mixed financial holding companies that have been granted approval in accordance with Article 21a of this Directive” [Article 11(2) of the CRR contains a similar provision although sub-consolidated requirements are not explicitly mentioned therein]. In the absence of other sub-consolidated requirements that would apply explicitly and directly to financial holding companies in the CRR, our understanding is that Article 3(3) of the CRD refers to the sub-consolidated requirements under Articles 11(6) and 22 of the CRR.

Based on the wording of Article 22 CRR, read in conjunction with Article 11(2) of the CRR and Article 3(3) of the CRD, it needs to be answered which is the entity in the following cases that shall comply on sub-consolidated basis pursuant to Article 22 CRR. In none of the cases below the subsidiary (mixed) financial holding company and the EU subsidiary institution are sister companies; rather in all of the cases below a parent-subsidiary relationship exists between them.

1. A group where an EU subsidiary institution has a parent undertaking established in the EU, which is a subsidiary (mixed) financial holding company, and that EU subsidiary (mixed) financial holding company (but not the EU subsidiary institution itself) has an institution or a financial institution as a subsidiary in a third country, or holds a participation in such an undertaking;

2. A group where an EU subsidiary (mixed) financial holding company has an EU subsidiary institution which in turn has an institution or a financial institution as a subsidiary in a third country, or holds a participation in such an undertaking, or

3. A combination of group structures (1) and (2), i.e. a group where the EU subsidiary (mixed) financial holding company and the EU subsidiary institution (the EU subsidiary (mixed) financial holding company being a direct parent of the EU subsidiary institution) each have a (direct) subsidiary institution or financial institution in a third country or each hold a participation in such an undertaking.

Based on the mere wording of Article 22 of the CRR (and ignoring Article 3(3) and Article 21a CRD), in each of the above three group structures the EU subsidiary institution would have to comply with prudential requirements either on the basis of a sub-consolidated situation of its EU subsidiary (mixed) financial holding company (scenario (1) and (3)) or on the basis of its own consolidated situation (scenario (2)).

4. A group with an EU subsidiary (mixed) financial holding company that does not have any subsidiary institution within the EU but has an institution or a financial institution as a subsidiary in a third country, or holds a participation in such an undertaking.

This group structure would not be captured by a mere wording of Article 22 CRR (if one were to ignore Article 3(3) and Article 21a CRD).

It may be questioned whether this was indeed the intention of the legislator and whether the sub-consolidating entity should not simply be, taking into account Article 11(2) CRR and Article 3(3) CRD and [in line with the EBA Q&A 2019_4711], the last subsidiary institution or (mixed) financial holding company in the Union which is the (direct or indirect) parent undertaking in accordance with Article 4(1)(15) CRR of a subsidiary (or of an undertaking in which the subsidiary institution holds a participation) established in a third country. When applied to the above group structures this approach would mean the following:

1. in group structure (1) only the EU subsidiary (mixed) financial holding company would be subject to the sub-consolidated requirement under Article 22 CRR (on the basis of its sub-consolidated situation).
2. in group structure (2) only the EU subsidiary institution would be subject to the sub-consolidated requirement under Article 22 CRR (on the basis of its own consolidated situation).
3. in group structure (3) only the EU subsidiary (mixed) financial holding company would be subject to the sub-consolidated requirement under Article 22 CRR on the basis of its consolidated situation ).
4. in group structure (4) the EU subsidiary (mixed) financial holding company would be subject to the sub-consolidated requirement under Article 22 CRR, but only if it were considered to meet the definition of a mixed financial holding company or financial holding company despite the fact it has no subsidiaries, which are institutions established in the EU.

In addition, Article 21a(1) second sentence CRD determines that other (mixed) financial holding companies than parent financial holding companies in a Member State, parent mixed financial holding companies in a Member State, EU parent financial holding companies and EU parent mixed financial holding companies shall seek approval where they are required to comply with this Directive or Regulation (EU) No 575/2013 on a sub-consolidated basis.

There seems to exist a vicious loop between the requirement in Article 22 CRR to sub-consolidate (granted approval is a prerequisite) and the obligation in Article 21a (1) second sentence CRD for other than parent (mixed) financial holding companies in a Member State and EU parent (mixed) financial holding companies to obtain approval (sub-consolidated requirements are a prerequisite). Therefore, if Article 21a (1) second sentence CRD would be understood as requiring that first the sub-consolidated requirement needs to be established, which in turn depends on the (mixed) financial holding company being approved, this provision would be without scope of applicability.