REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Legal Obstacles to the Free Movement of Funds between Institutions within a Single Liquidity Sub-Group
Date: 2014-06-05
Institutions: European Commission
Subjects: credit institution, financial control, financial intervention, financial legislation, investment company, parent company, subsidiary













EUR-Lex - 52014DC0327 - EN











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52014DC0327

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Legal Obstacles to the Free Movement of Funds between Institutions within a Single Liquidity Sub-Group /* COM/2014/0327 final */










1.         
Introduction & Objectives 

Background
Regulation (EU) No
575/2013[1]
("CRR") and Directive 2013/36/EU[2] ("CRD")
form the legal framework governing the access to the activity and the
supervisory framework and prudential rules for credit institutions and investment
firms (referred to collectively as "institutions").
CRR contains the
prudential requirements for institutions that relate to the functioning of
banking and financial services markets. The objective is to ensure the
financial stability of operators on those markets as well as achieve a high
level of protection for investors and depositors. In order to avoid market
distortions and regulatory arbitrage, these prudential requirements should
ensure a very high level of harmonisation.
However, several options
and discretions remain available to national competent authorities and Member
States. These include the possibility under Article 8 CRR for competent
authorities to waive liquidity requirements on an individual basis. Whilst the
waiver is subject to national discretion, it will greatly facilitate the
application of the new liquidity rules in a group context.  
The reason for this report
According to Article
8 CRR, the competent authorities may waive in full or in part the application
of Part Six of CRR, i.e. the liquidity requirements, to an institution and to
all or some of its subsidiaries in the Union and supervise them as a single
liquidity sub-group ("SLSG"), so long as they fulfil all stated
conditions.
Those conditions are:
(a) the parent
institution on a consolidated basis or a subsidiary institution on a
sub-consolidated basis complies with the obligations laid down in Part Six; 
(b) the parent
institution on a consolidated basis or the subsidiary institution on a
sub-consolidated basis monitors and has oversight at all times over the
liquidity positions of all institutions within the group or sub-group, that are
subject to the waiver and ensures a sufficient level of liquidity for all of
these institutions; 
(c) the institutions
have entered into contracts that, to the satisfaction of the competent
authorities, provide for the free movement of funds between them to enable them
to meet their individual and joint obligations as they become due; 
(d) there is no
current or foreseen material practical or legal impediment to the fulfilment of
the contracts referred to in (c).
According to the
last subparagraph of Article 8(1) CRR, the Commission shall report to the
European Parliament and the Council on any legal obstacles which are capable of
rendering impossible the application of condition (c) and is invited to make a
legislative proposal, if appropriate, by 31 December 2015, on which of those
obstacles should be removed.
In the past few
months, the European Commission has consulted directly with both industry and
national public authorities to identify possible obstacles to the free movement
of funds between institutions within a SLSG in the EU; to consider how these
might be overcome; and whether there is a need for regulatory action at EU
level. The Commission has also discussed this topic in the Commission Expert
Group on Banking, Payments and Insurance in September 2013. 

2.         
Possible Obstacles
to the Free Movement of Funds

The focus of this report is primarily on
cross-border situations, since this is the context within which obstacles are most
likely to emerge in practice. Moreover, the waiver regarding the application of
liquidity requirements on an individual basis for institutions and to all or
some of its subsidiaries, where all institutions of the SLSG are authorised in
the same Member State, is separately regulated under Article 8(2) CRR.
It should be noted that potential obstacles in
third countries will not be analysed in this report as, according to Article
8(1) CRR, the waiver only applies within the Union, even though the Commission
acknowledges that such obstacles would be a concern within the context of
supervision on a consolidated basis.
Freedom of capital movement as a general EU
rule
As a rule, there should be no restriction to
the free movement of capital within the European Union. Under Article 63 of the
Treaty on the Functioning of the European Union ("TFEU"), all
restrictions on the movement of capital and payments between Member States
shall be prohibited.
Therefore, a national law preventing
institutions from entering into contracts providing for the free cross-border
movement of funds between them to meet their individual and joint obligations
as they come due would in principle be a restriction forbidden by the Treaty,
which may be subject to infringement proceedings under Articles 258 et seq.
TFEU. Consequently, Member States cannot, as a general  principle, introduce national
laws directly prohibiting the free movement of capital. 
On the other hand, Article 65(1)(b) TFEU sets out
that the general rule expressed in Article 63 should be without prejudice to
the right of Member States to take all requisite measures to prevent
infringements of national law and regulations, in particular in the field of
prudential supervision of financial institutions, or to take measures which are
justified on grounds of public policy or public security. According to Article
65(3) TFEU, those measures should not constitute a means of arbitrary
discrimination or a disguised restriction on the free movement of capital and
payments. 
As a result, national requirements having
restrictive effects on capital flows cannot be considered per se as breaches of
Article 63 TFEU when they are not discriminatory, and are duly justified for
prudential purposes, suitable for securing the objective they pursue and
proportionate to that objective.
Exceptional circumstances may arise where it may
be justified to restrict the free circulation of capital by, for example,
imposing capital controls. In this regard, the Commission recently considered that
temporary restrictions to capital movements imposed by Cyprus were justified on grounds of public policy/public security (Article 65(1)(b) TFEU)
and overriding reasons of general interest. 
Ring-fencing
In practice, competent authorities in Member
States sometimes take actions aimed at retaining liquidity, dividends and other
bank assets within national borders, with potential prejudicial effects on
other Member States, i.e. so-called “ring-fencing” measures. Such ring-fencing
measures can be restrictions to the free movement of capital that are
prohibited by the Treaty unless duly justified and proportionate. There is also
a concern that national competent authorities may sometimes seek to evade the cooperation
obligations with other Member States required by the CRR and CRD.
Based on a confidential survey launched amongst
twenty-seven Member States, the Commission services have identified Pillar 2[3], the large exposures
regime[4]
and domestic liquidity frameworks[5]
as specific areas where the free movement of capital between institutions may be
hindered, either through measures authorised by the CRR/CRD framework or other
informal actions. 
The boundary between legal and illegal action
is sometimes blurred, as ring-fencing measures often occur within the context
of (or are masked by) legally authorised actions and/or in areas where competent
authorities enjoy discretionary powers.
However, the instruments used in the areas mentioned
above, such as Pillar 2 powers, clearly serve a valid and useful purpose, provided
they are applied in accordance with the law and are not disproportionate to their
prudential purpose. The mere fact that their use may result in a negative
effect on the possibility to transfer funds within a group does not justify
their automatic categorisation as legal obstacles in the sense of Article 8
CRR. It is only where these instruments are used for a purpose not in line with
EU legislation that they may be considered as obstacles. Such inappropriate use
should be avoided but does not imply that the instruments themselves should be
modified.  
Moreover, the purpose of this report is not to
put in question the recently agreed provisions in CRR and CRD relating to the above-mentioned
instruments. There is a clear and valid need for such instruments and their
inclusion in CRR/CRD is the result of long-standing and well-established supervisory
needs. Rather the purpose of this report is to examine legal obstacles arising
from other sources than the provisions of CRR and CRD.
Provisions under Company law
Some company law provisions, that prevent
institutions from providing liquidity to other members of the same group in an
unrestricted way, were cited during a consultation of stakeholders as a possible
obstacle to the free flow of capital within a group. This is especially the
case where the management of an institution is bound by a general fiduciary duty
to protect the interests of their institution (also at the expense of the wider
interests of the group of which an institution forms part). Therefore, even
though an institution enjoys excess liquidity, it is not automatically entitled
to transfer this to other group members, where repayment cannot be guaranteed.
An institution therefore cannot freely (at least not without further
consideration) enter into a contract with other group members that would
provide for the free movement of funds between the two.
However, such "obstacles" appear well
justified, especially as they are part of general company law principles, i.e.
that they also apply to companies in other sectors than banking. It would be
rather questionable if such a principle were not to apply. Such issues need to
be fairly resolved: either by properly guaranteeing repayment of any liquidity provided
or by using a different structures - such as branches - which are not separate
legal entities. 
Although Member States currently retain significant
powers regarding liquidity management by branches, these are of a different
character. They are related to prudential requirements and not to company law obligations.
Moreover, they will diminish in importance (see below - developments on
European liquidity rules and the Single Supervisory Mechanism).
Tax laws
While the existence of tax laws limiting tax
deductibility of interest paid on loans from other group members may arguably
hinder the free flow of capital, this does not seem to prevent institutions
from entering into a contract providing for the free flow of capital between
the two.[6]

3.         
On the Need to Address the Current Situation 

This review indicates that there do not appear
to be substantial legal obstacles preventing institutions from entering into
contracts that provide for the free movement of funds between them, at least
not in the sense of unsubstantiated legal obstacles. 
The first group of difficulties that
institutions might encounter when trying to enter into such contracts are
supervisory requirements (imposed by competent authorities) that in some cases
hinder the free flow of capital in the group. These requirements may be either
justified – where they are validly required by the situation of the individual
institution targeted by the supervisory requirement – or they may be
questionable – where the real, underlying objective of competent authorities is
to retain liquidity within their territories, thus excessively protecting national
taxpayers and creditors of the institution they supervise at the expense of
taxpayers in other EU Member States and creditors of other parts of the group.
The reactions from many Member States and their competent authorities demonstrate that such considerations are common and even
openly admitted. This suggests that many competent authorities are not fully
comfortable with the notion of a (cross-border) SLSG, as they see it as a potential
danger to national interests. Such behaviour (ring-fencing practices) – logical
from a purely national perspective, but with clear and significant negative
effects from a wider European perspective – is difficult to change without further
integration of the current regulatory and supervisory framework. In other
words, to effectively eliminate these practices, it is not sufficient to address
only the symptoms of the problem but also the underlying causes and fears. Therefore,
unless these underlying causes and fears are also addressed, competent
authorities could seek alternative means to achieve the same objectives.
To the extent that the underlying problem is
one of national self-interest, aligning the objectives of the public
stakeholders through greater European integration in the field of financial
services and more integrated supervisory responsibilities would seem a more efficient
way forward.
The European Banking Authority
A first important avenue to avoid or address
supervisory practices that limit the free flow of capital (to the extent that
they are not justified) is through the European Banking Authority ("EBA").
EBA plays an increasingly important role in facilitating cooperation among
competent authorities, providing expertise and establishing the Single
Supervisory Rulebook.
In particular, competent authorities should be
encouraged to improve cooperation and to make use of non-binding EBA mediation
in cases of disagreement on the question of whether the conditions for the
establishment of a SLSG are met. This is also true during the period before
2015, after which the CRR provisions on joint decision making and non-binding
mediation on this matter will become applicable[7].
After the observation period and after full
implementation of a liquidity coverage requirement in accordance with CRR, the
Commission will assess whether additional measures are necessary.[8]
The Single Supervisory Mechanism
An important step forward has been achieved with
the creation of the Single Supervisory Mechanism ("SSM")
through Council Regulation (EU) No 1024/2013[9].
The ECB will indeed have the legal capacity to supervise all credit
institutions of the euro area as well as those of countries that decide to join
the Banking Union. 
The SSM Regulation confers key supervisory
tasks and powers to the ECB over all credit institutions established within the
euro area. The ECB will directly supervise certain large credit institutions and
credit institutions which have requested or received direct public financial
assistance. The ECB will also monitor supervision by competent authorities of
less significant credit institutions. The ECB may, at any moment, decide to
directly supervise one or more of these credit institutions to ensure
consistent application of supervisory standards.
For cross-border credit institutions, active
both within and outside Member States participating in the SSM, existing
coordination procedures among home/host competent authorities will continue to
exist as they do today. However, to the extent that the ECB has taken over
direct supervisory tasks, it will carry out the functions of the home and host
authority for all participating Member States. This should lead to a significant
elimination of undesirable ring-fencing practices as described above. The greater
the number of Member States participating in the SSM, the less likely undesirable
ring-fencing practices will become. 
The Single Resolution Mechanism 
The establishment of the SSM is a first step
towards the Banking Union and one of the pre-conditions for direct
recapitalisation of credit institutions by the European Stability Mechanism. An
integrated Banking Union also includes a common credit institution resolution
mechanism underpinned by a single rulebook.
The Commission emphasized the
importance of reaching agreement on the proposals on credit institution restructuring and resolution and
deposit guarantee schemes, and on the Commission's proposal for a single
European resolution mechanism, to deal efficiently with cross-border credit
institution resolution and avoid taxpayers' money going into
rescuing credit institutions. The agreed legislation should
contribute significantly to the alignment of the objectives of public
authorities and further limit incentives for ring-fencing practices.
European
Liquidity Requirements
The Commission is preparing a delegated act, to
introduce a detailed and harmonised liquidity coverage requirement in the Union. This delegated act shall, according to Article 460(2) CRR, enter into force by 31
December 2014, but shall not apply before 1 January 2015. 
The delegated act should also help limit any
undesirable practices that trap liquidity within national borders, as it will provide
for harmonised, uniform, detailed and binding rules on liquidity, thereby
promoting mutual supervisory confidence between competent authorities.
In particular, the delegated act should seek to
address some issues linked to the cross-border intra-group liquidity management.
In the interests of efficiency and effectiveness, some banks conduct their
liquidity and treasury management on a group wide-basis. For groups not making
use of the SLSG (single liquidity sub-group) waiver, a preferential intra-group
flow can act as an important source of liquidity. This is described as 'preferential'
because a higher inflow is allowed to the beneficiary bank than would normally
be allowed on a ‘solo’ basis under the CRR.  This could be coupled if necessary
with a corresponding higher outflow for the bank providing the liquidity. Unfortunately,
during the financial crisis the realisation of these intra-group flows on a
cross-border basis sometimes proved unreliable.
Article 425.4 CRR sets out the conditions that
must be satisfied for the competent authorities to grant such a preferential
treatment for an inflow under a credit and liquidity facility. Article 425.4d CRR
requires the institution and the counterparty to be established in the same Member State. But Article 425.5 CRR allows competent authorities to waive this condition
provided additional objective criteria are met. The Commission will examine
whether these additional objective criteria can be framed in the forthcoming delegated
act. Corresponding provisions exist in Article 422.8d and Art 422.9 CRR in
relation to intra-group outflows.
In conclusion, in preparing the liquidity
coverage ratio delegated act, the Commission services will examine whether
additional objective criteria can be set to enable preferential treatment for
cross-border intra-group inflows and outflows. This should clarify and improve
the operation of cross-border intra-group flows that have sometimes been
problematic in the past.
Defence against discrimination of
cross-border groups
One possible source of discriminatory treatment is that national
authorities allow SLSG formation at a national level but not for an international
group. However, this should be partly mitigated by the fact that according to
Article 8(2) CRR, the competent authorities may waive the application of CRR
liquidity requirements to an SLSG at a national level only if the same basic conditions[10] that a cross-border
group has to meet are fulfilled.
As both the EU law requirements on
non-discrimination and general administrative legal principles would preclude
applying the same conditions in a different manner to purely national and
cross-border groups, there would have to be a relevant difference between those
groups in order not to allow creating a SLSG in a cross-border context where a SLSG
is allowed in national context. The mere fact that a group is a cross-border
one and that it is supervised by different competent authorities cannot be
considered on itself as a relevant difference.
Future review of CRR and CRD
The Commission is confident that a Single rulebook together with the
Banking Union will ensure consistency and safeguard financial stability. These
new rules will also ensure a level-playing field across the single market
between home and host authorities, as well as between Member States
participating and not participating in the SSM, thus preventing regulatory
arbitrage opportunities, artificial ring-fencing of capital and liquidity, and
facilitating cross-border banking recovery and resolution.
In possible future revisions of CRR and CRD, it
might be useful to re-examine the effect of discretionary powers by competent
authorities on the free flow of capital within groups. If necessary and where
possible (i.e. without impairing the scope and effectiveness of the relevant
instruments in justified cases), the Commission will assess whether such powers
should be framed in a way which leaves less discretion for potential measures
restricting the free flow of capital.  

4.         
Conclusion

In conclusion, given the fact that 
(i) the legislative process on CRR and CRD has
been completed only very recently (and thus the co-legislators’ approval of
existing national discretionary powers is recent), 
(ii) the Commission will explore whether the
forthcoming liquidity coverage ratio delegated act can help to limit any
undesirable practices that trap liquidity within national borders. In this
respect, it can seek to develop uniform, detailed and binding rules on
liquidity, thereby promoting mutual supervisory confidence between competent
authorities.  More particularly,, the delegated act could be an opportunity to establish
additional objective criteria facilitating the allowance of a preferential
treatment for cross-border intra-group inflows and outflows, thereby clarifying
and improving the operation of cross-border intra-group flows,
(iii) there is a steady process improving the
alignment of objectives of public stakeholders through greater European
integration with a Single Rulebook, the EBA and especially through the Banking
Union, and 
(iv) this review has not revealed relevant
legal obstacles that would prevent institutions from entering into contracts
that provide for the free movement of funds between them within a single
liquidity sub-group, 
the Commission does not see a need currently to
present a legislative proposal on this matter. However, the Commission will
continue to closely monitor and review the situation and should this
deteriorate, the Commission will reassess the need to make such a legislative
proposal.  
[1] Regulation of the European Parliament and of the Council of 26 June
2013 on prudential requirements for credit institutions and investment firms
and amending Regulation (EU) No 648/2012. OJ L 176, 27.6.2013, p. 1.
[2] Directive 2013/36/EU of the European Parliament and of the Council
of 26 June 2013 on access to the activity of credit institutions and the
prudential supervision of credit institutions and investment firms, amending
Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC. OJ L
176, 27.6.2013, p. 338.
[3] Where the position of an institution is deemed not sufficiently
strong or stable despite the fulfilment of the Pillar 1 requirements, competent
authorities are authorised to take Pillar 2 measures. According to Article
86(3) CRD, competent authorities shall take effective action where institutions
have risk profiles in excess of those required for a well-functioning and
robust system. Articles 104((1)(k) and 105 CRD allow imposing specific
liquidity requirements.
[4] Under the large exposures regime, there is potential leeway for
capital movement restriction where intra-group exposures are restricted within
a binding large exposures limit. According to Article 395(1) of the CRR, an
institution shall not be exposed to another group entity, after taking into
account the effect of credit risk mitigation, beyond 25% of its eligible capital,
unless exempted from the large exposures regime according to Articles 400(1)(f)
and 400(2)(c), (e) and (f) CRR. The competent authorities may also impose
stricter large exposures limits on institutions under Pillar 2, in particular
where they consider that the concentration risk is not appropriately monitored
and addressed (Article 81 CRD). The large exposures regime also establishes
specific provisions aimed directly at intra-group exposures for which Member
States may, under certain conditions, apply a large exposures limit below 25%
on a sub-consolidated basis (Article 395(6) CRR). However, in this particular
case, the Commission may reject the proposed national measures if it considers
that they, inter alia, create an obstacle to the free movement of capital in
accordance with the provisions of the TFEU (Article 395(8) CRR).
[5] Under Articles 412(5) and 413(3) CRR, Member States may maintain or
introduce national provisions in the area of liquidity and stable funding
requirements before binding minimum standards are specified and fully
introduced in the Union. As a result, and at least until 2018 (or 2019 where
the Commission decides to alter the phase-in specified in Article 460 and
defers until 2019 the introduction of a 100 % binding minimum standard for the
liquidity coverage requirement (Article 461 CRR)) for the liquidity coverage
requirement, Member States are allowed to maintain or introduce national
provisions in the area of liquidity, that are more conservative than the
CRR/CRD framework and require a binding liquidity coverage requirement of up to
100%.  
[6] However, these tax laws may limit the incentive to provide for the
free flow of capital, as they increase the tax burden for the group.
[7] See Article 8(3) and Article 21 CRR in connection with Article
521(2)(a) CRR .

[8] See
recital 30 of CRR.

[9]
Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific
tasks on the European Central Bank concerning policies relating to the
prudential supervision of credit institutions. OJ L 287, 29.10.2013, p. 63.
[10] Those laid down in Art. 8(1) CRR. Where the SLSG has a cross-border
nature, also the conditions laid down in Art. 8(3) CRR (applicable as of 1
January 2015) have to be met.