24 April, 2017
Committee on Economic and Monetary Affairs, European Parliament
Economic and Financial Affairs, Council of the European Union
Financial Stability, Financial Services and Capital Markets Union, EuropeanCommission

Comments on the Proposed Reforms to EU Banking Rules
Japanese Bankers Association
On November 23, 2016, the European Commission (the “Commission”) published
a comprehensive package of reforms to EU Banking Rules, comprising of amendments
to the Capital Requirements Regulation (“CRR”), the Capital Requirements Directive(“CRD”) and the Bank Recovery and Resolution Directive (“BRRD”).
We, the Japanese Bankers Association (“JBA”), recognize that the EU and Japaneach has a significant presence in both the global economy and the financial markets,and plays a key role in the setting of international standards regarding financial
regulations. Therefore, it is crucial for both EU and Japan to respect and comply withthese international standards to ensure the credibility and effectiveness of the standards.
We, however, are concerned that the proposed reforms to EU banking rules
recently published by the Commission are not entirely consistent with international
regulatory framework and include requirements that may have adverse effects oneconomic and financial activities in both EU and Japan. Our concerns and thoughts arestated below in sections 1 through 4.
We acknowledge that the activities of EU corporations and financial institutions
have contributed to the Japanese economy. Likewise, we believe that activities ofJapanese corporations and financial institutions, including member banks of JBA, havecontributed to the EU economy. We strongly believe that both the EU and Japan should
maintain a deep reciprocal relationship so that companies in the EU and Japan cancontinue to contribute to each other’s economy.

11. Requirement for non-EU financial institutions to establish an intermediate
parent undertaking.
Article 21b of the CRD proposal requires non-EU financial institutions to establish
an intermediate parent undertaking (“IPU”) simply because Global Systemically
Important Institutions (G-SIIs) have more than one subsidiary in the EU. It is ourconcern that this requirement would impose an unnecessary burden on non-EU financial
institutions while its benefit is not necessarily clear. Therefore, we believe that it would
be necessary to carefully consider the consequences of this requirement.
(1) Negative impact arising from ring-fencing
According to the proposal, non-EU financial institutions are required to group theirsubsidiaries operating in the EU and manage capital and liquidity under the IPU. Thisaction, however, would lead to the ring fencing of capital and liquidity within the IPU,
undermining the flexibility of non-EU financial institutions in accommodating the needsof their affiliates in other jurisdiction.
Our concern is that this requirement may lead other jurisdictions to introduce
similar ring-fencing requirements in order to ensure financial stability within their own
jurisdictions. If respective jurisdictions introduce ring-fencing, this could end up with afragmentation of global financial markets and the international financial regulatory
framework, with foreseeable consequences in terms of higher concentration of financial
activity within certain markets and lower levels of competition. These developments
would translate into higher costs for banks and negative repercussions in terms ofbanks’ abilities to finance the real economy and economic growth.
The Commission had previously expressed its concern that the proposed
Intermediate Holding Company (“IHC”) requirement imposed on foreign banking
organizations by the U.S. would give rise to a negative impact through ring-fencing andretaliatory actions by other jurisdictions. 1 Such a concern is still the case, and we have
similar concerns with regard to the Commission’s present proposal.

1The letter of August 2013 sent from Mr. Barnier, the former member of the Commission, to Mr.
Bernanke, the then chairman of the Federal Reserve, concerning the U.S.’s Intermediate Holding
Company (“IHC”) requirement

https://www.federalreserve.gov/SECRS/2013/May/20130530/R-1438/R-1438_041913_
111076_515131431183_1.pdf

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(2) Consequences of the establishment of an IPU
The Commission indicates the purpose of requiring the establishment of an IPU is“to simplify and strengthen the resolution process of third-country groups withsignificant activities in the EU.”
Many financial institution groups establish an overseas subsidiary by business line
(e.g., commercial banking, trust banking and securities) under the parent company in thehome jurisdiction. For financial institution groups with such a corporate structure,grouping business-line-based subsidiaries within the EU under an IPU would lead to a
weakening of their global governance structure. Moreover, if business lines are
separated between jurisdictions, this may become an impediment to executing abusiness-line-based liquidation strategy or to taking necessary actions in times ofrecovery or resolution.
In addition, the Commission’s proposal requires non-EU financial institutions toconsolidate their small subsidiaries in different member states in the EU that may not
qualify as a “material sub-group” on their own, under an IPU. However, this proposal
does not set forth a detailed supervision and resolution framework for IPUs as a whole,and hence it is not clear how the framework that the Commission proposes will actuallywork within the EU.
Therefore, we believe that it is highly questionable whether the IPU requirement
would actually contribute to simplification and strengthening of the resolution processof non-EU financial institutions; indeed, we believe that it is probable that such arequirement will have the opposite effect, and will needlessly complicate and weakenthe resolution process.
(3) Leveraging of the European resolution college
Article 89 of the BRRD proposal illustrates the mechanism which facilitates
cooperation between resolution authorities in the EU (i.e. the European resolutioncollege). We believe that such mechanism can work for non-EU financial institutions
with multiple subsidiaries in the EU and without an IPU.
We believe that this mechanism will ensure flexible and effective resolution of
non-EU financial institutions and thereby enhance resolvability without the burden ofestablishing an IPU.
(4) Call for evidence and cost benefit analysis
The call for evidence and cost benefit analysis apply to the proposed reforms ofCRR/CRD, except for article 21b of the revised CRD proposing the requirement toestablish an IPU.
3We believe that it would be preferable for the Commission to provide financial
institutions and non-EU authorities with an opportunity for dialogues, including publicconsultation, in order to collect evidence and conduct cost benefit analysis regarding therequirement to establish an IPU as well.
2. Consideration for the IPU requirements
If non-EU financial institutions are to be required to establish IPUs, we thenrequest that the Commission to give careful considerations to the following points.
(1) Non-EU G-SIIs
We believe that it is not necessary to automatically require G-SIIs to establish anIPU.
A non-EU G-SII may have a small amount of total assets in the EU despite having
more than one subsidiary in the EU. Further, a non-EU G-SII’s overall operations in theEU may be very simple despite having more than one EU subsidiary. The impacts on
the EU financial system of the bankruptcy of a non-complex G-SII with few assets inthe EU would be limited, even if that G-SII has more than one subsidiary in the EU.
Therefore, in determining whether to apply the IPU requirements, it would beappropriate to take into account proportionality; that is to say, the degree of impact on
the EU financial system and the group-level resolution strategy. Also the determination
whether to apply the requirement should take into account the results of consultations
with home authorities or at the CMG.
(2) Revisions to the proposed threshold for the IPU requirement①

Exclusion of branch assets
EU subsidiaries of non-EU financial institutions are subject to the regulationsof the EU or member states where they are located, and the competent authorities of
the EU or member states undertaking the supervisory role and oversee theresolution process.
On the other hand, with respect to EU branches of non-EU financial
institutions, in principle, the competent authorities in the home country undertakethe supervisory role and oversee the resolution process.
The treatment of subsidiaries and branches is clearly different. When assessing
the threshold for the IPU requirement, it would be appropriate to take into accountonly assets of EU subsidiaries of non-EU financial institutions in the calculation ofthe threshold, and to exclude assets of the branches of non-EU financial institutions
located in the EU from the calculation.
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②

Raising the threshold for the IPU requirement
In setting a quantitative threshold for the IPU requirement for all non-EU
financial institutions including G-SIIs, we believe that the threshold of “total assetsof EUR 30 billion” is too low as a threshold for total assets of the IPU on aconsolidated basis, including EU subsidiaries and branches. We assume the figurerefers to the EU single supervisory mechanism’s threshold, but we note that thisthreshold is based solely on total assets of a stand-alone financial institution, not on
a consolidated basis.
Furthermore, we note that the proposed threshold is too low compared to thethreshold for the US IHC requirement (i.e. USD 50 billion).
Therefore, we believe that it is appropriate to raise the proposed threshold.

(3) Treatment of branches
EU branches of a non-EU financial institution belong to the same legal entity as
the head office of the financial institution and are subject to regulations and supervisionby the home country authorities. On the other hand, EU subsidiaries are subject toregulations and supervision in the EU or member states where they are located. If debts
and credits of EU branches are required to be held under an IPU which is an EU entity,
a significant amount of cost will be imposed and customers of non-EU financial
institutions will be significantly affected because a corporate personality of the EUbranches has to be legally changed.
The Financial Stability Board (“FSB”) recognizes this distinction in its final ruleon “Principles on Loss-absorbing and Recapitalization Capacity of G-SIBs inResolution” and the consultative document “Guiding Principles on the Internal Total
Loss-Absorbing Capacity of G-SIBs,” treating branches as an integral part of a foreignbank head office and excluding them from the scope of internal TLAC.
We strongly support the Commission’s proposal not to group branches of a non-EU
financial institution under an IPU.
(4) Subsidiaries to be grouped under IPUs
We believe it appropriate to clarify that “institution” for purposes of the IPU
requirement should be defined as including credit institutions and investment firms inaccordance with the definition under the CRD (i.e. institutions holding a license forbanking or securities businesses), while those nonbanks and other financial institutions
that do not have a license for banking or securities businesses should be excluded fromthe IPU requirement.
In addition, it would be appropriate to exclude from the IPU requirement any5

subsidiaries that hold a banking license for undertaking ancillary services (e.g.
settlement services) but that engage in a non-banking business as their core business(such as those subsidiaries that specialize in asset administration services).
Further, in the case of non-consolidated companies and minority investments, it islikely that there is another company that has more control over them. We therefore
consider that it should be clarified that such non-consolidated companies and minority
investees also should not be grouped under IPUs.
3. Considerations in light of Brexit
Given that Brexit is expected to take place, it would be unreasonable to subject UK
subsidiaries to an IPU requirement. Therefore, it should be clarified that subsidiaries
located in the UK are excluded from the scope of article 21b of the proposed CRDrevision.
Moreover, since non-EU financial institutions will be inevitably influenced by
Brexit (e.g. they will need to review their organizational structure in Europe), webelieve that a reasonable conformance period of at least three years should be provided
after the UK leaves the EU and before implementing any IPU requirement.
4.

Deference to international regulatory frameworkIn order to maintain the effectiveness of the Basel regime and also to ensure a
global level playing field, national authorities have respected international regulatory
framework and strived to align their national regulations with such framework.
Some aspects of the proposed reforms to EU banking rules are not consistent with
the international regulatory framework published by the Basel Committee on Banking
Supervision or the FSB. Such proposed frameworks to EU banking rules, if enacted,
would trigger similar trends in other jurisdictions and prompt regulatory fragmentation,
and as a result, may undermine the credibility and the effectiveness of international
regulatory framework. It is our understanding that EU regulatory authorities have sharedsimilar concerns in this respect. 22ECB President Draghi commented “regulatory measures should be implemented in a balanced way that
ensures a level playing-field globally.” Vice-President of the European Commission Dombrovskis
commented that “it is important to maintain a level playing field across both jurisdictions (inimplementing TLAC)” and in another occasion that “ What would happen if financial sector rules in
New York, Hong-Kong, London, Paris, Frankfurt or Singapore were very different? First, these centres
would become more exposed to risks being imported from jurisdictions with less stringent rules.
Second, it would become more expensive for global financial institutions to comply with different legalrequirements. Third, regulatory differences would give financial institutions incentives to engage inregulatory arbitrage”.
See the website set forth below for respective comments.

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Particularly with respect to the introduction of internal TLAC in the EU, there are
two concerns as described in paragraphs (1) and (2) below. Going forward, internal
TLAC should be introduced in a way consistent with the international framework.
(1) Process for determining the internal TLAC requirement in the EU
The primary objective of the proposed reforms to EU banking rules is to introduce
the internal TLAC requirement within the EU and ensure consistency with theinternational framework.
However, the proposed reforms to EU banking rules are inconsistent withinternational framework. The proposed rules set the internal TLAC requirement at 90%
of external TLAC without any consultation between home and host authorities. In
contrast, the FSB’s TLAC Term Sheet provides as follows: “each material sub-groupmust maintain internal TLAC of 75% to 90% of the external Minimum TLAC
requirement that would apply to the material subgroup if it were a resolution group, ascalculated by the host authority. The actual Minimum Internal TLAC requirement
within that range should be determined by the host authority of the material sub-groupin consultation with the home authority of the resolution group.”
Currently, a process for determining the internal TLAC requirement is underdiscussion at a global level based on the FSB’s consultative document “GuidingPrinciples on the Internal Total Loss-absorbing Capacity of G-SIBs.” Any final rule
regarding determination of internal TLAC in the EU should be consistent with theFSB’s guidance, and therefore should be determined after the Guiding Principles areinternationally agreed.
(2) Scope of application of the internal TLAC requirement in the EU
In order to ensure consistency with the FSB’s internal TLAC framework, the scopeof application of the internal TLAC requirement in the EU, if imposed on non-EU
financial institutions, should be the “material sub-group” in line with the internationalframework. Therefore, whether an IPU is subject to the internal TLAC requirement
would be determined based on whether the IPU is a material sub group. Whether an IPU
is a material sub-group should be determined through consultation between home andhost authorities.

http://www.ecb.europa.eu/press/key/date/2016/html/sp161118.en.html
http://europa.eu/rapid/press-release_SPEECH-16-3336_en.htm
http://europa.eu/rapid/press-release_SPEECH-17-261_en.htm

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Furthermore, while internal TLAC requirements for non-bank entities are currently
consulted as part of the FSB’s “Guiding Principles on the Internal Total Loss-absorbing
Capacity of G-SIBs,” we would request careful considerations to the inclusion of EU
non-bank entities in the scope of internal TLAC.

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