5 September, 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
Proposals Regarding the EU Banking Reform(Proposed IPU Requirements)
Japanese Bankers Association
We, the Japanese Bankers Association (“JBA”), are a banking industry group inJapan which is comprised of 138 domestic banks and 51 foreign banks operating inJapan.
We submitted “Comments on the Proposed Reforms to EU Banking Rules” 1 onApril 24, 2017 in response to a comprehensive package of reforms to EU Banking Rules,
comprising of proposed amendments to the Capital Requirements Regulation (“CRR”),
the Capital Requirements Directive (“CRD”) and the Bank Recovery and Resolution
Directive (“BRRD”), which was published by the European Commission (the“Commission”) on November 23, 2016.
Of the issues described in the comment letter noted above, we would like torequest additional considerations and modifications of provisions pertaining to theproposal on the intermediate parent undertaking (“IPU”) which will be a significant
issue for Japanese banks.
[General comments]
From our standpoint, it is unclear whether the EC’s proposal to require third
country financial groups to establish an IPU (per Article 21b of the proposedamendments to CRD) is an optimal measure in order to achieve the stated objectives,1
See the following site for JBA’s previous comment letter (“Comments on the Proposed Reforms to EU BankingRules” (2017/4/24)):https://www.zenginkyo.or.jp/fileadmin/res/en/news/news170424.pdf

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including the improvement of resolvability and strengthening of supervision for third
country financial groups. Given the size of operations and business models of Japanesebanks in the EU, the benefits of establishing an IPU would not necessarily outweigh thecosts associated with the organizational restructuring a bank would have to go through,and therefore, we would like to request additional considerations and modifications ofprovisions to the EC’s proposal.
 In the proposal, the Commission states that the establishment of an IPU isnecessary in order to improve the resolvability of third country financial groups,
however the Commission did not provide a concrete explanation about themechanism behind how it could enhance resolvability.
 Given the profile, size and simplicity of Japanese banks’ business in the EU,
there could be cases where the banking group in the EU consolidated under an
IPU may neither be directly supervised by the European Central Bank (“ECB”)
nor be subject to the resolution planning by the Single Resolution Board (“SRB”)
even if an IPU were to be established. Assuming that's the case, the establishmentof an IPU would not lead to the strengthening of supervision and enhancement of
resolvability especially in a case IPU and its operating subsidiaries are located indifferent EU member states.
In this context, we take the same view as a statement made by the Council of theEuropean Union in its presidency progress report (para. 172) of June 16 2, pointing out“the lack of a cost/benefit assessment and the necessity of further discussions” withrespect to the EC’s IPU proposal.
If third country financial groups are required to establish an IPU, some banks may
be forced to concentrate their assets and human resources in a specific EU member state,
which may widen regional disparities within the EU. Therefore, the cost/benefit
assessment should also take into account such possible adverse effects on third country
financial groups and the EU itself.
We support and agree with the policy objectives of appropriately supervising third
country financial groups that have a significant presence in the EU and improving theirresolvability in order to prevent adverse effects on the global financial system.
We believe that additional consideration and modification of proposed texts arenecessary by taking into account of points 1 to 4 described in [Specific comments] to2

http://data.consilium.europa.eu/doc/document/ST-9484-2017-REV-1/en/pdf2

ensure that the proposal meets its objectives appropriately. Furthermore, to develop theunderstanding of relevant parties and facilitate more practical discussions going forward,
clarification of provisions would be needed as described in [Other technicalmodifications].
[Specific comments]
1. Obligations for global systemically important institutions (“G-SIFIs”) toestablish an IPU
The profile, size and complexity of operations within the EU vary across third
country financial groups. Therefore, the principle of proportionality should be appliedeven to G-SIFIs.
Article 21b (3) of the proposed amendments to CRD requires the establishment ofan IPU to all G-SIIs (G-SIFIs) having multiple subsidiary institutions in the EU without
exception. This provision should be modified to apply the principle of proportionality,for example, as follows: “A G-SIFI is required to establish an IPU only if, as a result ofconsolidating its subsidiary institutions under the IPU, the IPU is deemed to be asignificant institution as defined under the Single Supervisory Mechanism (“SSM”)
Regulation and becomes subject to ECB’s direct supervision and the Single Resolution
Board (“SRB”) becomes the resolution authority.” There could be a case where direct supervision by the ECB and resolution
planning by the SRB will not be necessary since, even if an IPU is established,
the IPU is neither deemed as a material sub-group defined in the TLAC Term
Sheet developed by the Financial Stability Board (“FSB”) nor a significant
institution defined in Article 6(4) of the SSM Regulation (in fact, it is the likely
scenario for Japanese banking groups). In such a case, respective competent
EU member state authorities will presumably be responsible forsupervision/resolution. If so, the establishment of an IPU would notnecessarily lead to the strengthening of supervision and improvement ofresolvability especially in a case where an IPU and its operating subsidiaries
are located in different EU member states.
 Despite costs incurred for organizational restructuring, if the establishment of
an IPU does not give significant benefits in the context of the strengthening ofsupervision and improvement of resolvability, it is an unreasonablerequirement and entails a risk of undermining the Japanese banking groups’
existing global governance framework which is in place aligned to business3

line (i.e. commercial banking, trust banking and securities business).
2. Treatment of branches
Branches of third country financial institutions (“third country branches”) are
subject to home authorities’ regulations and supervision, which are based oninternational standards, including the Basel Accords.
Therefore, we strongly support the Commission’s proposal to not consolidate third
country branches under an IPU and believe it unnecessary to modify the provisionpertaining to the treatment of branches.
 Requiring third country branches to be consolidated under an IPU indicates thatEU authorities consider the home authorities’ regulation/supervision based oninternational standards, including the Basel Accords, insufficient and therefore,
impose their own regulation/supervision on third country branches. This meansthat the sovereignty of home authorities to regulate and supervise third country
branches will be reassigned to EU authorities. However we do not view
regulation/supervision by our home authorities insufficient. We note thatJapanese authorities do not impose their regulation/supervision on foreign
financial institution’s branches operating in Japan. And even in the U.S., it is
not required to group branches of foreign financial institutions under the U.S.
Intermediate Holding Company (“IHC”).
 If non-EU (i.e. third country) financial groups are obliged to consolidate EU
branches under an IPU while EU financial groups are not subject to thecorresponding requirements in non-EU jurisdictions, this will create an unlevelplaying field in terms of global competition and reciprocity between non-EU
financial groups and EU financial groups will be undermined. We areconcerned that such a situation may transform the EU financial market to anunfair, protectionist and closed market.
 If third country branches in the EU are consolidated under an IPU, the large
exposures limit will be reduced significantly as the underlying capital base will
become smaller. As a result, third country financial institutions will not be able
to provide needed credit in the EU and third country financial groups will beforced to change their terms and conditions of existing loans, including theamount. This will have a negative impact on customer’s funding activities,
including EU companies, and ultimately, the EU economy as well.
 Traditionally, major Japanese banks operate in the EU in the form of branch. If
third country branches were to be consolidated under an IPU, Japanese banks
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would not only have to change the legal form of branches but also would haveto restructure their loan portfolios to comply with the large exposure limit.
 Furthermore, other jurisdictions might require third country branches to beconsolidated under a locally-incorporated company and to be subject to theirlocal regulation/supervision, as a retaliation measure against the IPU
requirement in the EU. This will lead to legislative fragmentation acrossjurisdictions, which will undermine global competition and possibly increasefinancial costs for end-users.
 Some officials of relevant EU institutions have publicly stated that it isnecessary to consolidate branches under an IPU. However, since there aremany corresponding issues as discussed above, we strongly disagree with sucha view.
3. The UK’s exit from the EU
While discussions of the proposed reforms to EU Banking Rules are expected to beheld in parallel with Brexit negotiations, it is not appropriate to subject UK entities tothe IPU requirement given that the UK’s exit from the EU is anticipated.
In order to clarify that only those subsidiaries existing within the EU, not including
the UK, will be subject to the IPU requirement, we suggest that the Commission
specifies in the proposed amendments to the CRR or CRD that the cut-off date todetermine subsidiaries to be consolidated under an IPU is set on or after April 1, 2019,
given Brexit is scheduled in the previous month.
Furthermore, an adequate period of time for preparation should be provided
between the cut-off date of determining subsidiaries to be consolidated under an IPU
and the due date of establishing the IPU, in order to allow thorough considerations for
its operations and structures, and carrying out necessary procedures for itsestablishment.
 Setting the cut-off date for determining subsidiaries to be consolidated under anIPU at a date before Brexit would theoretically mean that third country
financial groups would have to temporarily consolidate UK entities under anIPU and then to remove them from that parent once the UK exits from the EU.
 Such organizational changes are not meaningful at all and would even impose
significant operational burdens and risks on third country financial groups.
This is also a significant burden for relevant supervisory/resolution authorities.
 Third country financial groups should be provided with a necessary preparation
period to allow for considerations of a group-based operational / governance5

structure and process for the IPU establishment (at minimum 12 months after
the cut-off date, and at least 36 months after the legislation is posted on theofficial journal and takes effect). Otherwise, relevant parties will faceconfusion and third country financial groups will not be able to completegroup restructuring in time, because they will be forced to simultaneously
work on Brexit planning and the IPU establishment, under very unclear anduncertain environment.
4. Relating to the resolution strategy(1) Ensuring consistency in the cross-border resolution process and coordination
among relevant authorities
In order to develop an orderly cross-border resolution process of G-SIFIs,
coordination among relevant authorities is essential because their resolution
strategies within the EU should be consistent with the home authority’s globalresolution plan/strategy.
We therefore propose that the proposed amendments to BRRD or CRD tospecify the process where the SRB or the resolution authority of each EU
member state (hereinafter referred to as “EU resolution authority”) coordinateswith the home authority of a third country financial group, to consult andconfirm that the establishment of an IPU does not impede the execution of thethird country financial group’s global resolution by the home authority and isconsistent with the home authority’s resolution plan/strategy.
 In the Key Attributes, the Financial Stability Board (“FSB”) requires
coordination among relevant authorities in cross-border resolution.
 The Commission explains that the objective of the establishment of an IPU
is to improve the resolvability of third country financial groups. To achieve
this objective, coordination between the EU resolution authority and thehome authority should be ensured.
(2) Respecting the international agreement on internal TLAC/MREL
We support the policy goal of the Commission’s proposal, i.e. toimplement the FSB’s TLAC requirement into the MREL requirement within theEU and ensure consistency with international standards.
Article 92b of the proposed amendments to CRR that imposes the MREL
requirement only on material subsidiaries is consistent with the international
standard. However, the proposed amendments to CRR do not provide specific6guidance on the process for determining the necessity and specific requirements
for internal TLAC/MREL.
Therefore, we request the Commission to insert the proposed amendments
to CRR or BRRD in line with the FSB’s international standard: “Whendesignating an IPU or its subsidiaries as a material subsidiary, the EU resolution
authority should provide the rationale and consult with the home authority on
the necessity and specific requirements for internal TLAC/MREL (i.e. theamount and terms).”
 To align with the FSB’s international standard, the application of the MREL
requirements to an IPU (i.e. the amount and terms) should be determinedthrough consultation between the home and the EU resolution authority.
 If the EU authority applies the MREL requirements at its discretion without
consulting with the home authority, this will undermine the international
agreements/standards and also lead to fragmentation of resolution strategy,
making optimal allocation of the group loss-absorbing capacity difficult.
 We note the objective of MREL is to maintain critical functions and enable
orderly resolution process without imposing any burden on taxpayers bysecuring loss-absorbing and recapitalization capacity of financial groups intimes of resolution. Requiring third country financial groups with nomaterial critical functions within the EU to consolidate their EU subsidiaries
under an IPU, followed by the designation as a material subsidiary andapplying the internal TLAC/MREL requirements to such groups would
mistake the means for the end and would not be appropriate per se.
[Other technical modifications]
To develop the understanding of relevant parties and facilitate more practical
discussions going forward, clarification of provisions would be necessary as describedhereunder.
1. Definition of subsidiaries to be grouped under an IPU
We propose to clarify Article 21b (or in the recital of the CRD) of the proposed
amendments to CRD that “institution” for purposes of the IPU requirement include
credit institutions and investment firms in accordance with the definition under the CRD(i.e. institutions holding a license for banking or securities businesses), and thatnonbanks and other financial institutions that do not have a license for banking orsecurities businesses are out of scope from the IPU requirement.
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2. Ownership requirement of subsidiaries grouped under an IPU
We propose to modify Article 21b of the proposed amendments to CRD thatsubsidiaries consolidated under an IPU do not necessarily have to be a wholly-owned
subsidiary of the IPU.
 The Commission’s proposal uses a term ‘subsidiary,’ clearly indicating that anIPU is required to own a majority stake of subsidiaries consolidated under it. It ishowever uncertain whether the IPU needs to own 100% stake of such
subsidiaries.
 A group structure varies across financial institutions. In order to optimize
governance structure within the group, an ownership structure needs to beflexibly determined.
 Requiring an IPU to wholly own its subsidiary will undermine the flexibility of
an investment strategy. Investments in the EU by third country financial groups
may be reduced if they will not be able to execute less-than-100% strategic
investments in banks and securities companies within the EU.
3. Scope of a third country group
We propose to modify Article 21b of the proposed amendments to CRD to clarify
that the term “third country group” used in the article means the consolidated group of
the parent company.
 Under the current proposed article, it is unclear if an entity in which the ultimate
parent owns a minority interest (i.e. the entity is not within the scope of theparent’s consolidation) is out of the scope of the “third country group.” To consolidate an EU subsidiary of a company which is not within the scope of
the parent’s consolidation and to subject the EU subsidiary to a consolidated
supervision is not reasonable and is highly impracticable.
Furthermore, with respect to an EU subsidiary of the company which isconsolidated but not wholly owned by the parent company, we request that Article 21bof the proposed amendments to CRD explicitly allows the exclusion of EU subsidiaries
from the scope of the IPU requirement if the supervisory authority provides explicit
consent.
 Consolidating EU subsidiaries of non-wholly owned entity under an IPU would8

be difficult or even impossible, due to complex procedures and negotiation withother shareholders, especially in the case where the company is publicly traded.

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