February 14, 2022
Directorate-General for Financial
Stability, Financial Services and CapitalMarkets Union
European Commission
1049 Bruxelles/Brussels
Japanese Bankers AssociationBelgium

JBA comments on provisions in the draft EU Capital Requirements Directive VI (“CRDVI”) regarding cross-border business and third country branches
Dear Sir/Madam,
The Japanese Bankers Association 1 (JBA) welcomes the opportunity to provide feedback on the EuropeanCommission’s draft Capital Requirements Directive VI (“CRD VI” 2 ). In this letter, we set out to respond to theproposed changes to the supervision of third country branches (TCBs) in the EU and to the proposed changes
to the cross-border provision of banking services by third country undertakings.

1. General comments
The JBA supports the European Commission’s efforts towards further harmonising supervisory powers andtools across EU Member States, as this will bring enhanced transparency and strengthen supervision across theEU banking landscape. Notwithstanding our general support for the objectives of the Commission’s proposals
in CRD VI (the Proposals), we do have several significant concerns regarding the provisions of theProposals in relation to cross-border business and TCBs, which are highlighted herein. These provisions
must be balanced with the objectives of bringing benefits for corporations and financial institutions throughimproved market access, choice and reduced friction in financial services within the EU. As currently drafted,
however, we believe there will be significant adverse impact on the ability of TCBs to provide services to EU
clients, leading to a reduction in choice for European businesses and a reduction in liquidity in EU financial
markets.

1The Japanese Bankers Association is the leading trade association for banks, bank holding companies and bankers
associations in Japan. As of February 14, 2022, the JBA has 114 Full Members (banks), 3 Bank Holding Company
Members (bank holding companies), 77 Associate Members (banks & bank holding companies), 58 Special Members(regionally-based bankers associations) and one Sub-Associate Member for a total of 253 members.
2
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021PC0663&from=EN1

Japanese banks are highly invested in and committed to the EU, helping to finance the European economy byproviding EU clients with various kinds of financial service through TCBs in certain EU Member States. Weurge the European Commission to consider the critical contribution which the Japanese TCBs make to
the European economy, and to strike the right balance between EU policy objectives.

2. Role of Japanese banks in the EU
Japan is one of the EU’s largest trade partners, and this partnership will further expand as a result of the EUJapan Economic Partnership Agreement. Through its support for Japanese and EU businesses, the Japanesebanking sector not only facilitates trade flows between the EU and Japan but also with the rest of theworld. This enhances competition and brings diversity of funding sources, which, in turn, gives the EUbusinesses access to deep pools of global capital and liquidity.
Japanese banks are deeply integrated in the Single Market and by the nature of their businesses, provide longterm sources of finance for not only European clients but also for European infrastructure projects that hasremained stable through changing market cycles. Many of these activities rely on integrated solutions,
including liquidity provision and other services, provided by the Japanese banking groups for the EU asa whole and through TCBs in certain EU Member States. TCBs allow global banks to utilise their groupbalance sheet, which brings benefits for financial stability by virtue of being subject to global prudential
requirements3. Examples include global credit facilities, large syndications, project finance, global trade finance,
global risk management facilities, as well as support for the individual operations of clients on the ground in
multiple EU Member States.
It seems unclear how such financial services could continue to be provided under the Proposals without either
establishing branches in each Member State or significantly expanding the remit of an existing subsidiary or
converting TCBs to subsidiaries, which may not be viable from a cost perspective and is an inefficient useof capital as it does not enable Japanese banks to benefit from economies of scale through their global
balance sheet. We reiterate the need for the European Commission to consider before finalising the Proposals
the critical contribution that Japanese TCBs make to the European economy.

3. Issues with the TCB Proposals
In general, the Proposals would lead to an increase in capital, liquidity and reporting requirements, but also anincrease in counterparty and liquidity risks, and subsequently the cost of capital. Ultimately this will cause areduction in lending capacity for Japanese banks looking to serve their existing and potential EU clients. This
reduced economic activity would negatively affect the European economy and the Single Market as well as the3Japan’s Basel Framework is assessed as being compliant with the global standards agreed by the Basel Committee through
BCBS’s Regulatory Consistency Assessment Programme (RCAP). Japan is the only jurisdiction that deemed “compliant”
among major financial markets.

2ability of Japanese banks to fully support important EU policy objectives, such as the move towards sustainablefinance and helping rebuild a post-COVID-19 Europe.
Based on the economic arguments set out herein, it is essential that the regulatory and supervisory proposals
for TCBs should be subject to a thorough impact assessment to achieve a proportionate regulatory
treatment that enables business to continue, a point acknowledged recently by the EBA4. Furthermore, theimpact assessment should carefully consider the possible negative effects on funding for European and Japaneseclients operating in the EU, on infrastructure, and on other investments.
We draw your attention to the following most pertinent points in the Proposals concerning TCBs for which theJBA requests further consideration.

i.

Assuring visibility over TCBs

We agree that it is of critical importance that both the national competent authorities and EU-wide authorities
have appropriate visibility over TCBs. In this context, the Proposals do not give adequate consideration to theexisting framework of Supervisory Colleges and Crisis Management Groups, which is the well-establishedmechanism for cooperation between home and host authorities. In addition, TCBs are required to report therecovery plans covering the TCB to their competent authorities5, which would have improved visibility over theTCB and its head undertaking. If the EU has concerns about TCBs’ activities within the EU, this should, in thefirst instance, be addressed by engaging with the home authority through the said cooperation mechanism,
and in a close liaison between the national competent authorities and EU-wide authorities. If this proves
insufficient, the primary option to be considered should be how the framework itself can be empoweredto address the emerging risks, as opposed to introducing additional host requirements by way of new
and/or additional regulations.
In short, the EU’s concern for visibility over the TCBs should be addressed not by the proposed
regulations that potentially could cause drastic change with consequential impact on the EU economy,
but by steady efforts to improve existing home-host supervisory cooperation and closer communication
between the national competent authorities and EU-wide authorities.

ii.

Ability to conduct cross-border business

4REPORT TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COMMISSION ON THE TREATMENT
OF INCOMING THIRD COUNTRY BRANCHES UNDER THE NATIONAL LAW OF MEMBER STATES, IN
ACCORDANCE WITH ARTICLE 21b (10) OF DIRECTIVE 2013/36/EU, JUNE 2021.
5This requirement is stipulated in Article 47 of DIRECTIVE (EU) 2019/878 OF THE EUROPEAN PARLIAMENT AND
OF THE COUNCIL of 20 May 2019 (CRD5).

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In the first place, the choice between serving clients via branches and/or subsidiaries should be the choice ofindividual institutions depending on their business model. Global regulators have long held that both branchand subsidiary structures have certain features that make them suitable for cross-border banking business6. The
choice of entity is largely dependent on the business model and type of activity they undertake. In each case,the chosen entity is of course subject to the respective supervisory approvals. As the EBA mapping exercise
indicates, nearly all non-EU banks operating in the EU do so via branches rather than subsidiaries. This is nodifferent to the preference of EU banks operating in Japan. All EU-headquartered banks operating in Japan areengaged in banking business through branches.
There are currently cases where the national competent authorities permit certain “cross-border” activities to be
conducted with clients in their Member States. Article 48c 3 (d) and Article 21c would, if implemented, override
existing Member State regimes with a much-restricted regime, which would lead to a severe reduction in thechoice of financial service providers for EU businesses. This reduction in choice and competition could reduce
the quality of service and increase costs for EU businesses. In addition, a comprehensive impact assessment has
not been conducted based on the restrictions imposed on cross-border business.
Furthermore, in certain circumstances, the restrictions on cross-border business would have a disproportionate
impact on many peripheral EU Member States, who may no longer be served at all by TCBs. The EBA mapping
exercise of TCBs indicated that only 17 Member States host TCBs and 6 of those only have one TCB within
their borders. To avoid such a disproportionate impact, it is important that TCBs are allowed to continue
to conduct cross-border transactions into other EU Member States.
The Proposals also bring uncertainty for cross-border transactions out of the EU. Furthermore, the Proposals
may prevent EU corporations from setting up subsidiaries or expanding their overseas business to accessfunding in other jurisdictions. If the EU is to strengthen its position as an open and international financial
market, cross-border transactions should be allowed for TCBs not only within the EU, but also outsideof the EU to the extent that this is permitted by the national competent authorities.
It is our understanding that the main purpose of the Proposals is to bring about a common supervisory framework
for TCBs in the EU, while still maintaining the openness of the EU financial market and encouraging third
country banks to provide banking services into, out of and within the EU. If this is indeed the intention of theProposals, competent authorities should not be restricted to having the power to grant rights for TCBs tooperate cross-border into other EU Member States and indeed outside the EU. This could then be assessedagainst compliance with capital requirements as outlined in Article 48e. We see this as consistent with the aimsof the EU’s Capital Markets Union project and a logical and fair step towards further harmonisation across EU
Member States.
Basel Committee on Banking Supervision “PRINCIPLES FOR THE SUPERVISION OF BANKS’ FOREIGNESTABLISHMENTS”, May 1983 (https://www.bis.org/publ/bcbsc312.pdf), and “The Supervision of Cross-BorderBanking”, October 1996 (https://www.bis.org/publ/bcbs27.pdf)
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iii.

Importance of intra-group funding and interconnected activities

The ability for third country banking groups to transact with their own branches, subsidiaries or affiliates
established in the EU is a critical factor in how global banks operating across regions manage their intra-groupfunding and risk management. However, the Proposals do not differentiate between intra-group funding andother external transactions in all aspects of the requirements 7 , and therefore the Proposals could create
unnecessary inefficiencies for global banks, including additional funding costs and the uneven challenge toexpand local funding sources if a TCB cannot rely on intra-group funding. We would argue that intra-groupfunding from/to CRR equivalent jurisdictions should be excluded from any threshold in order not tocreate any unnecessary liquidity concerns. It should also be noted that the Japanese regulator, JFSA, does not
impose such regulatory restrictions on European banks’ branches in Japan, thus not allowing Japanese banks tocompete on a level playing field.
Regarding intra-group funding, the branch structure and ability to access the group balance sheet enables
banking groups to conduct funding activities more efficiently in wider global wholesale markets, rather thanraising the necessary funds in each local market. This facilitates economies of scale and enables the TCB toutilise the credit standings and published credit ratings of the bank. We are not of the view that the use of TCBs
and group balance sheets provides any unfair advantage for third country banks; rather, this provides funding
to businesses that would not otherwise be available. The ability to utilise the group balance sheet through thebranch also permits the bank to support clients with larger transactions. This in turn boosts economic growthand has a positive impact on financial stability through additional liquidity in EU markets. We believe that theProposals should be amended to ensure that intra-group funding activities by TCBs can continue.
If the Proposals were to be implemented in their current form, there is also a concern associated with Article
48j and its required assessment of whether a TCB is of systemic importance for the EU and the Member State
where it is established, by reference to the “interconnected activities” of a TCB with other TCBs and subsidiariesof the same group in the EU. Ultimately, this could prohibitively hinder the ability of a TCB to provide services
in the EU, if all those activities are unconditionally deemed to be interconnected with branches or subsidiariesof the same group in other Member States. We would urge that the definition of the term “interconnectedactivities” be appropriately narrowed down to cover only those activities entailing systemic risk.

For example, cross-border inter-group funding into, out of and within the EU and the €30bn threshold for subsidiarisation
requirements.
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iv.

Reauthorisation of existing businesses

Reauthorisation takes up considerable time and resources from banks and their supervisory authorities alike.
Using the EBA’s data8 on total assets as a proxy for authorisations, the analysis indicates that 86% of thesereauthorisations would fall to supervisory authorities in Belgium, France, Germany and Luxembourg.
The reauthorisation process would raise significant uncertainty in the immediate term. On the assumption that
the Proposals would require all TCBs currently operating in the EU to be reauthorised within 12 months fromwhen CRD VI is transposed by EU Member States, existing TCBs could be forced to cease operation if theirapplications are still pending at the end of the 12-month adaptation period, which would pose considerable
business continuity risks. This could affect the certainty and ability of global banks to serve their EU clientsfrom TCBs once the deadline for reauthorisation approaches, disrupting the business-as-usual of supervisory
authorities and banks.
To minimise disruption, transitional arrangements should be put in place to allow supervisory authorities
sufficient time to conduct their assessments and TCBs sufficient time to implement any new requirements,
including, where necessary, through the grandfathering of existing authorisations to ensure the TCBs
can continue to operate.
Furthermore, it would seem unevenly disproportionate to require unconditionally all TCBs to obtain
authorisations again from the ground up. Instead, it would make more sense for them to only have to obtainany further authorisations in excess of those required by the applicable EU Member State, so as to meetthe future minimum EU standards.

v.

Forced subsidiarisation

The Proposals stipulate that a competent authority may require a TCB to subsidiarise or take other actions suchas restructuring their activities to fall below the relevant €30bn threshold. We would urge competentauthorities to consult in detail with the respective banks about which activities could and should be
conducted safely and securely by their TCB(s) before thresholds are applied and subsidiarisation isrequired. As an example, subsidiaries are generally unsuitable for providing large transactions and global
financial services/products and the management of intra-group funding due to capital constraints. Therefore,
third country banks would still require the use of TCBs to maintain their business model.

8REPORT TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COMMISSION ON THE TREATMENTOF INCOMING THIRD COUNTRY BRANCHES UNDER THE NATIONAL LAW OF MEMBER STATES, IN
ACCORDANCE WITH ARTICLE 21b (10) OF DIRECTIVE 2013/36/EU, JUNE 2021.

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Using a threshold merely focusing on the total asset value does not necessarily represent systemic risk, if any,
posed by a TCB. We would argue that competent authorities should be given the power to make asupervisory judgement on whether a TCB should have systemic importance, and it should be made clearthat the requirement of subsidiarisation is intended as a final resort, given the extent of supervisory andregulatory measures available prior to a requirement to subsidiarise. Again, we reiterate our view that, at thevery least, intra-group funding from/to CRR equivalent jurisdictions should be excluded from any
threshold, as this is subject to rigorous capital requirements at group level. Japan is one of the jurisdictions thatare recognised as being “compliant” with the global standards agreed by the Basel Committee through BCBS’sRegulatory Consistency Assessment Programme (RCAP)9.
The timeframe to comply with a regulatory requirement to subsidiarise or restructure should be proportionate
with the action being undertaken. In the event of a requirement to subsidiarise, the proposed 3-month grace
period in Article 48k (6) is insufficient to allow banks to make necessary changes to legal structures. We would
argue that the grace period should be agreed on a flexible basis with the regulator, commensurate withthe degree and nature of the systemic risk posed by the TCB as well as its planned actions to reduce any
systemic risk.
***We thank the Commission for the opportunity to comment on the draft CRD VI package and hope to form astructured dialogue between regulators and the industry to explore the economic consequences of the Proposals
and possible solutions.
Yours faithfully,
Japanese Bankers Association

9

https://www.bis.org/bcbs/implementation/rcap_jurisdictional.htm

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