Intermediate Parent Undertaking: time to prepare
19 September 2018
It’s approaching two years since the European Commission (EC) published its CRR II/ CRD V proposals and the pace of negotiations has been slow. But since the spring, negotiations have stepped up and political pressure to find an agreement by the end of 2018 is building up.
This means that impacted firms should ramp up their planning for one of the most controversial aspects of the proposals: the requirement for large non-EU banking groups with two or more entities in the EU to establish an ‘Intermediate EU Parent Undertaking’ (IPU).
The purpose of the IPU proposal is to consolidate the EU activities of the largest non-EU banking groups under a single IPU. The EC expects the regime to facilitate group supervision and enhance the resolvability of the firms in scope. The proposal is also likely to increase the ECB’s supervisory powers (as the consolidating supervisor of the IPUs in the euro area), particularly as the EC is also proposing that the ECB be given supervisory oversight over systemic investment firms.
So what would the final IPU look like? And what should firms be doing to prepare for it?
Despite opposition from many in the industry, some member states and certain non-EU countries, the option to remove the IPU requirement completely is not on the table. The open questions relate to the IPU structure and which firms it applies to.
The EC’s IPU proposal would have required all G-SIBs regardless of their size in the EU, as well as those groups with more than €30 billion assets in the EU, to set up a single IPU.
Negotiations over the asset size threshold and whether all non-EU G-SIBs should be automatically included are ongoing. The agreement in the Council of member states (the Council) raises the asset threshold from €30bn to €40bn and removes the requirement for all G-SIBs to form an IPU. The European Parliament (EP) is proposing to retain the thresholds proposed by the EC. Also, both the Council and the EP have agreed to allow a dual-IPU structure where home country regulations require deposit taking and investment banking to be separated. This means that some groups will be able to set up separate IPUs for the deposit taking and investment banking parts of their business, in line with their home country rules.
The Council also proposes an implementation period of four years. This may provide some comfort but the experience of establishing Intermediate Holding Companies in the US, and the ongoing ring-fencing reforms in the UK, suggest that those are complex and lengthy processes. Firms that start planning at an early stage will find the process less costly and problematic over the long term.
There are still many uncertainties regarding what the final IPU requirement will look like. Even so, firms likely to be captured by the final IPU rules should start thinking about some of the issues now, in particular considering the following questions: is the right data on balance sheet size and other key metrics readily available for when regulators ask? Will an existing subsidiary or holding company be the IPU? Will the IPU need to be authorised? What impact will the IPU have on recovery and resolution planning? How will intra-group exposures be impacted? What are the tax implications of the envisaged new structure?
Beyond those, the IPU requirement will result in significant strategic, operational and regulatory challenges. Planning ahead will make the transition to the new model less painful.
