The People’s Bank of China and China Banking Regulatory Commission sent a comment letter to the European Commission, the Council of the European Union and the European Parliament regarding the comprehensive package of proposals to further strengthen the resilience of EU banks.
For our comment letter, please find below.
Joint Comment Letter on the Intermediate Parent Undertakings Proposal
The People’s Bank of China
China Banking Regulatory Commission
This letter is to comment on the Proposals to Further Strengthen the Resilience of EU banks from European Commission dated 23rd November 2016, particularly on Article 21b of the Capital Requirement Directive (‘CRD Article 21b’) that requires non-EU groups above certain threshold to establish intermediate EU parent undertakings (IPU) in the Union.
We welcome the presidency compromise from the Council of the European Union on 27th November 2017, specifically the removal of the requirement that any global systemically important institutions (G-SII) from a third country group, regardless of the number of institutions it has, shall establish an IPU in the Union. We believe this compromise to the initial proposal would serve better to its stated objectives, bring more flexibility to the IPU scheme, and reduce the complexity associated with organizational restructuring within third country groups.
However, certain aspects of the proposed amendments to the CRD and comments respectively from the Council of the European Union and the European Central Bank (ECB) need further consideration. Particularly, we would like to draw your attention to the following issues:
I. Chinese authorities have not imposed any comparable IPU requirements on foreign financial institutions in China at this point.
II. In light of the fact that the intended supervisory benefits may not be proportionate to the potential compliance cost, we would ask for the reconsideration on the threshold of EUR 30 billion for the proposed EU IPU requirements (as a reference, the US IHC requirements have a threshold of USD 50 billion of total assets in the US, excluding those of branches).
III. We would ask for the reconsideration on the appropriateness of calculating total assets including those of branches, and incorporating existing branches into the new IPU.
First, as a global practice, overseas branches of a Chinese bank are regulated and supervised by Chinese authorities as home regulators, in close collaboration with host authorities. The Chinese banking authorities have established bilateral cooperation mechanisms including MOUs with the financial authorities in many EU jurisdictions. Also, supervisory colleges are in place for Chinese G-SIBs. This facilitates efficient and effective home-host supervisory cooperation to ensure the safety and soundness of Chinese bank branches. In addition, the European Commission, adopting first equivalence decision for the purposes of credit risk weighting Regulation (EU) No 575/2013 in December 2014, determined that China applies regulatory and supervisory arrangements that are equivalent to those applied in the Union, with respect to credit institutions, investment firms, and exchanges. Hence, we would ask for reconsideration on the incorporation of existing branches of Chinese banks in EU into a new IPU under the EU regulation and supervision.
Second, given the fact that EU branches of Chinese banks mainly conduct wholesale business for Chinese enterprises operating in EU while the branches’ retail business is minimum, if these branches are obliged to be consolidated under the IPU, the exposure limit will be significantly reduced as the capital base will be smaller. These branches will have to renegotiate loan terms and conditions with existing clients, which will negatively impact both their clients and reputation, and further restrain their capacity to extend credit lines to new clients. Moreover, their capacity to provide trade finance and facilitate bilateral trade will be significantly restrained, which is not in line with the growing momentum of China-EU trade relations.
Third, we believe it necessary to take into consideration of the unintended consequences on the operations of the Chinese G-SIBs in EU because of the possible overlapping between the IPU requirements and the existing FSB requirements. Chinese regulatory authorities have adopted Basel III and FSB requirements in supervising Chinese G-SIBs and imposed heightened supervisory standards and requirements, and are committed to continued dialogue and cooperation with EU financial authorities regarding this issue. Currently, Chinese G-SIBs have all formulated recovery and resolution plans (RRP), adopted single-point entry strategy and prepared to implement TLAC. Under such framework, whenever an overseas establishment of a Chinese G-SIB encounters difficulties, it will then get sufficient solvency support from headquarters through the “bail-in” arrangements rather than relying on external “bail-out”.
Fourth, the proposed EU IPU requirements have been viewed by many as the response to IHC requirements in the US. However, the proposed EU requirements have a wider scope when calculating total assets by including branches, and a lower threshold of EUR 30 billion (compared to USD 50 billion in the US rules). Such stricter requirement from the EU might lead to further legislative restriction from regulators in other jurisdictions, which may eventually reduce the capacity of banks to finance the economy and trade.
IV. The supervision of financial holding companies and mixed financial holding companies needs clarification.
Although the operations of Chinese banks in EU countries are mostly banking licensed branches and subsidiaries, there are some other non-bank subsidiaries. We share common concern with the ECB that further clarification is needed regarding the supervisory treatment of FHC and mixed FHC.
We understand that the proposed rules will be finalized in consultation among the European Commission, European Parliament, and European Council. We do hope that the above concerns might be given due consideration and we look forward to continued dialogue on this matter.
Copyright: China Banking Regulatory Commission