Single Rulebook Q&A

Question ID: 2016_2870
Legal act : Regulation (EU) No 575/2013 (CRR)
Topic : Liquidity risk
Article: 33
Paragraph: 5
Subparagraph: b
Article/Paragraph : 33(5)
COM Delegated or Implementing Acts/EBA RTS/EBA ITS/EBA GLs: Delegated Regulation (EU) 2015/61 - DR with regard to liquidity coverage requirement
Subject matter : Cap on inflows for consumer finance or leasing and factoring activity
Question:

When a bank constituting a single liquidity subgroup is applying for a preferential treatment in accordance with Article 33(3) or Article 33(4) of the LCR Commission Delegated Regulation (EU) 2015/61 at consolidated level, does Article 33(5)(b) of the LCR Commission Delegated Regulation (EU) 2015/61 refer to the balance sheet value of the individual entities or to the consolidated single liquidity sub-group?

Also, when assessing a request in accordance with Article 33(3) or Article 33(4) of the LCR Commission Delegated Regulation (EU) 2015/61 at individual level, is it possible to exclude some components of the total balance sheet when checking if the ratio ‘activities as referred to in Article 33(3) over total activity’ or ‘activities as referred to in Article 33(4) over total activity’ exceeds 80% of the total balance sheet (e.g. shareholdings in subsidiaries performing the same activity, refinancing agreements toward these subsidiaries)?

Background on the question:

Pursuant to Article 33(5)(b) of LCR Commission Delegated Regulation (EU) 2015/61, only credit institutions having a ratio of consumer finance or leasing and factoring activity exceeding 80% of their total balance sheet may receive a waiver in accordance with Article 33(3) and 33(4) as provided under the LCR Commission Delegated Regulation (EU) 2015/61.

Generally, banks will have to comply with the LCR on an individual and consolidated basis. In a first scenario, imagine a bank constituting a single liquidity subgroup applying for an exemption from the cap on inflows in accordance with Article 33(3) or 33(4) of LCR Commission Delegated Regulation (EU) 2015/61 at consolidated level. In this case, the question is whether Article 33(5)(b) of the LCR Commission Delegated Regulation (EU) 2015/61 refers to the balance sheet value of the individual entities or to the consolidated total balance sheet value of the single liquidity subgroup. We note the EBA response to Q&A 2013_483 : ‘Where, in accordance with Article 8(1) of the CRR, a competent authority waives the application of liquidity requirements to an institution and to all or some of its subsidiaries, and instead supervises them as single liquidity subgroup, the liquidity subgroup in question shall comply with Part Six on the consolidated basis of that subgroup’.

In a second scenario, imagine a holding entity with some subsidiaries where the holding entity wants to apply for an exemption from the cap on inflows in accordance with Article 33(3) or 33(4) of LCR Commission Delegated Regulation (EU) 2015/61 at individual level. The holding entity, even if specialised in performing leasing and factoring or consumer finance activity, may have a ratio below 80% on an individual basis due to the fact that the balance sheet is inflated by the its shareholding in its subsidiaries (even if these subsidiaries perform the same activity) and refinancing agreements toward these subsidiaries. At consolidated level, the group will comply with the 80% threshold, and on an individual basis, all the entities of the group, apart from the holding entity, comply with the 80% threshold without the exclusion of the above mentioned elements. However, the ratio of the holding company on an individual basis would be above the 80% threshold if we excluded its shareholdings in subsidiaries and internal refinancing agreements from the calculation of the ratio. We consider that these exclusions make sense from a prudential point of view because:

- For the shareholdings in subsidiaries, the subsidiaries of the holding entity are performing the same business and the same activities as the holding entity and all of them have a ratio of main activities (as referred to in article 33(3) or article 33(4)) over total assets above 80%. From an accounting perspective, these shareholdings cannot be seen as consumer finance activity; from a prudential perspective, these are shareholdings in subsidiaries performing consumer finance activities, hence could be considered as consumer finance activities. This is also why at consolidated level and without neutralisation, the group has a much higher “main activities to total balance sheet” ratio.
- Internal refinancing agreements are credit lines granted by the holding entity to support its consumer finance subsidiaries and are accounted on-balance sheet. This is due to the fact that in the subgroup, the holding entity supports its subsidiaries in order to have only one main liquidity centre in charge of collecting liquidity for the subgroup. Those refinancing agreements are inflating the balance sheet but are due to liquidity management of the subgroup that permit each subsidiary to focus on consumer finance activities. If they did not exist, each subsidiary would have to collect its own liquidity on the market, hence decreasing the capacity of the holding entity to manage and supervise the liquidity of its subsidiaries.

Considering the abovementioned rationale and the recital 16 of the Delegated Act “…taking into account the existence of specialised business models, certain exemptions to this cap, either full or partial, should be permitted to give effect to the principle of proportionality and subject to the prior approval of the competent authorities….” we are in the view that the purpose of the 80% threshold is to ensure that only credit institutions performing activities as referred to in Article 33(3) or in Article 33(4) may receive this waiver, hence excluding the above mentioned elements for the purpose of the calculation of the ratio should be possible.

Date of submission: 12/08/2016
Published as Final Q&A: 14/07/2017
EBA answer:

The exemptions of the inflow cap in Article 33(3) and (4) of the LCR Commission Delegated Regulation (EU) 2015/61 are envisaged for certain specialised credit institutions, under the compliance with the conditions required in paragraph 5.

As stated in Article 33(6) these exemptions may be granted by the competent authority at an individual and/or consolidated level subject to the compliance with the requirements set out in Article 33(5) at an individual and/or consolidated level respectively. Accordingly, at consolidated level the total balance sheet referred to Article 33(5)(b) would be that of the consolidated liquidity sub-group.

As per the same Article 33(5), those specialised credit institutions, in order to become eligible for the exemption of the inflow cap, shall demonstrate, among others, that at least 80% of their total balance sheet consists of activities of leasing, factoring, financing for the acquisition of motor vehicles or consumer credit. In this regard, the computation of the “Total balance sheet” does not allow for exclusions of any item of the balance sheet.

For the calculation under Article 33(5)(b) of the ratio at an individual level,shareholdings in subsidiaries, intragroup financial support or agreements should not be reflected in the numerator of that ratio like items related to the main activity of the institutions applying for the exemption, even if the relevant subsidiaries focus their activities on that kind of activities (e.g. consumer finance or leasing and factoring activity).

Status: Final Q&A
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