The PRA has issued a statement clarifying its interpretation of the concept of “durable link” in the Capital Requirements Regulation (CRR). The statement explains that the durable link concept is important for ascertaining whether a holding of less than 20% in another undertaking is to be treated as participation for the purposes of CRR. In turn, this determines the correct capital treatment of the investment in the hands of the firm. In accordance with the CRR, the PRA requires firms to proportionally consolidate participation interests in other undertakings. Non-participatory significant investments must be deducted from regulatory capital, subject to specific thresholds.
The PRA’s interpretation of durable link takes into account the definition of “significant influence” under the accounting framework. While an accounting determination of significant influence is a key factor in determining whether here is a durable link, other factors regarding the financial governance and management intent of the firm’s management will also be taken in account. In particular, the PRA will consider:
- whether the firm’s management intends to maintain or increase its financial stake in the undertaking;
- the role the firm’s management intends to play in the undertaking’s governance and management; and
- whether such arrangement are aligned with the firm’s longer-term strategic ambition.
The PRA will consider evidence of an intention by a firm’s management to maintain or increase the level of its holding or to maintain a significant or strategic business relationship with the undertaking. The PRA will also consider a firm’s role in the governance and management of the undertaking in considering whether a durable link exists.
View PRA statement on concept of “durable link” under CRR, 20 October 2016