Although the wording of Article 84(1)(a)(i) CRR seems clear, different interpretations have arisen as to how it applies in practice, particularly in the case of third country institutions operating under a regulatory framework different from CRD IV/CRR.

In our view, one of the key purposes of Article 84(1) is to ensure that the amount of minority interests that is included in consolidated CET1 capital is consistent with the stated goals of the CRR (and other regulation), that is of ensuring that capital is adequately distributed within a financial group, to reflect potentially different levels of risk in different activities, markets or geographies.

Such goal is stated, for example, in Recital (37) of the CRR: “In order to ensure that own funds are appropriately distributed within the group and available to protect savings where needed, the capital requirements should apply to individual institutions within a group” and in Recital (7) “This Regulation should, inter alia, contain the prudential requirements for institutions that relate strictly to the functioning of banking and financial services markets and are meant to ensure the financial stability of the operators on those markets as well as a high level of protection of investors and depositors.”

These goals are best achieved if an appropriate and homogeneous methodology (the CRR methodology) is consistently applied to determine the capital needs of each component of the group regardless of its place of incorporation, and proper incentives are in place to promote a capital allocation consistent with such needs.

Moreover, and even though local requirements would in any case need to be considered if our proposed interpretation is not adopted (since non-recognition of minority interests may only occur upon specific derogation pursuant to Article 7 of CRR and, even in such case, any local requirements would need to be deemed additional requirements), in our view the CRD IV/CRR goals would not be properly pursued if regulation at the parent company level were to promote capital allocation in subsidiary institutions according to potentially less demanding local regulation (especially when minority interests at the subsidiary level might demand the higher local dividend distributions that such less demanding regulation would allow).

Thus, if the regulation at parent company level fully discards the capital attributable to minorities that exceeds lower local requirements, it is effectively encouraging such higher local dividend distributions and, in certain circumstances, might lead to levels of local distribution that are not fully compensated for at the parent company level, which is clearly not a desirable outcome from a prudential standpoint.

This can only be effectively avoided where capital requirements are measured in a consistent manner for each component of the group, i.e., in accordance with the common rules and requirements of the CRD IV/CRR. Bearing in mind that additional capital may be required at the local level, the CRR consistently provides that relevant CRD IV/CRR requirements may be added by any additional local requirements (i.e. these would be relevant to the extent they exceed CRD IV/CRR requirements).

This view was shared by a number of institutions in the context of the consultation paper published by EBA in respect of the Draft Regulatory Technical Standards on Own Funds, and notably EBA’s Banking Stakeholder Group, which emphasized “the need that Article 84 be interpreted as recognising local prudential requirements when these are higher than the requirements at consolidated level. We think that Article 84 should be read as that the only difference in the calculation between (i) and (ii) is the elimination of intragroup positions but the minimum ratio to apply should be the higher between the consolidated and the local” (See EBA/CP/2013/17).

EBA´s answer to Q&A 2013_487 also appears to confirm the view that subsidiaries’ CET1 capital for the purposes of Article 84(1)(a) of the CRR should be calculated in accordance with CRR rules, notably Article 50 (and, therefore, not with local rules, which, as per the wording of the Article 84.1(a)(i) and (ii), would only be relevant when imposing additional capital requirements).