Question ID:
2022_6408
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Topic:
Own funds
Article:
37
Paragraph:
b
Subparagraph:
N/A
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
N/A
Disclose name of institution / entity:
No
Type of submitter:
Credit institution
Subject Matter:
Calculation of goodwill included in the valuation of significant investments in insurance undertakings
Question:

A. For the purposes of a deduction under Article 36(1)(b) CRR as per Article 37(b), should the goodwill (Article 4(1) no. 113 and 115 CRR) included in the valuation of significant investments calculated excluding goodwill booked under an insurance subsidiary given that this goodwill is not included in the valuation of a significant investment of the bank (i.e. goodwill not included in the prudential consolidation as per Articles 1, 11, 18 and 24 of CRR and EBA RTS on the methods of prudential consolidation)? 

B. Can you confirm that the goodwill booked under an insurance subsidiary (which is excluded from the valuation of significant investments as per prudential consolidation) should be treated as part of the equity exposure of the bank to the insurance subsidiary and this be risk weighted as per Article 49(1) and Articles 133 or 155 (depending on Standardized or Advanced IRB method)?

Background on the question:

From a prudential perspective, insurance sector entities controlled by a bank (parent entity) are excluded from the scope of banking consolidation under the CRR (Article 1 and 24, as well as recital points 4, 5 and 7), as is also specified in EBA Q&A 2013_383 related to CRR Article 18 and in the EBA RTS on the methods of prudential consolidation. As such, insurance sector entities do not consolidate globally with the rest of the banking balance sheet, but are rather treated as a participation or stake using the equity method (net of assets and liabilities).  Furthermore, from a financial conglomerate perspective, and according to Commission Delegated Regulation (EU) No 342/2014. the overall capital position of a financial conglomerate is calculated at Group level based on consolidated accounts, not requiring any accounting treatment to take into account particular exposures booked under an insurance company owned by a financial institution.

According to the CRR and the Basel framework (CAP30.7 FAQ1), the only goodwill to be deducted in the calculation of CET1 is the goodwill generated at the parent level (i.e., the bank) in relation to the insurance company. Thus, the goodwill sitting within the balance sheet of insurance companies owned by financial institutions should not be deducted from capital but treated as part of the exposure to the insurance company (i.e., risk-weighted).

This approach is consistent with the treatment prescribed by Article 37, CRR, from a capital requirements perspective, under which goodwill booked under insurance companies should not be deducted from capital because this goodwill is not included in the valuation of a significant investment of the bank. That is, the goodwill booked under insurance companies arises directly at the insurance subsidiary level; therefore this goodwill is recognised in the insurance company financial statements and is different from goodwill that may be generated at the bank level when acquiring the control of an insurance business.

Furthermore, following EIOPA regulation Article 12, goodwill in insurance undertakings shall be valued at zero for the purpose of the Solvency Capital Requirement (‘SCR’) calculation. Hence goodwill shall be deducted from own funds for SCR reporting purposes

As an illustration: Assume bank A has recorded a goodwill of 10 on the bank’s balance sheet following the acquisition of an insurance business B. Assume also that insurance B has recorded on its own balance sheet additional goodwill for 5 (due to other acquisitions made directly by the insurance company B). In this case goodwill included in the valuation of the significant investment made by the bank A in the insurance company B as per Article 37(b) should be 10 (the amount of goodwill currently recorded in the prudential balance sheet of bank A).

Date of submission:
24/03/2022
Published as Rejected Q&A
26/07/2022
Rationale for rejection:

This question has been rejected because the matter it refers to is in the process of being answered in Q&A 6211.

Status:
Rejected question
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