The European Banking Authority (EBA) has issued a consultation on draft regulatory technical standards (RTS) specifying the different methods of prudential consolidation, which can be applied when certain conditions and criteria are met.
The EBA has developed the draft RTS in accordance with the mandate in Article 18(7) of the Capital Requirements Regulation (CRR) pursuant to which the ‘EBA shall develop draft RTS to specify conditions according to which consolidation shall be carried out in the cases referred to in paragraphs 2 to 6 of Article 18 of the CRR. The EBA has also taken into consideration the work of the Basel Committee on Banking Supervision on the identification and management of step-in risk, which is also relevant for the subject matter of the draft RTS.
In particular, the draft RTS elaborate on some criteria / indicators and some conditions for the application of different methods of consolidation (full consolidation, proportional consolidation, aggregation method) or the application of the equity method in the following cases:
- use of proportional consolidation on a case-by-case basis according to the share of capital that a parent undertaking holds in a subsidiary (Article 18(2) of the CRR);
- use of the aggregation method for undertakings managed on a unified basis pursuant to a contract, memorandum or articles of association; or undertakings’ whose administrative, management or supervisory bodies consist in the majority of the same persons in office (Article 18(3) of the CRR);
- use of proportional consolidation where participations held in institutions, financial institutions or ancillary services undertakings are managed together with other non-consolidated undertakings (Article 18(4) of the CRR);
- whether and how consolidation shall be carried out in some specific cases of participations or capital ties (Article 18(5) of the CRR); and
- whether and how consolidation shall be carried out in cases of significant influence without holding a participation or other capital ties and of single management other than pursuant to a contract, memorandum or articles of association (Article 18(6) of the CRR).
The draft RTS also include several indicators that should be assessed by institutions in order to identify which undertakings can lead to step-in risk. However, they have a more limited scope than the guidelines recently produced by the Basel Committee (here) as the purpose of the draft RTS is to determine the methods of prudential consolidation only under a Pillar I approach. The draft RTS do not cover all entities that may give rise to step-in risk.
The deadline for comments on the consultation is 9 February 2018.