Article 36(1)(b) CRR (EU 575/2013) requires that intangible assets, except for prudently valued software assets, are deducted from Common Equity Tier 1 items, whereas Article 37(b) CRR requires that the deduction should include also goodwill included in the valuation of significant investments of the institution. Also, according to Article 36(1)(i) CRR, significant investments in financial sector entities should be deducted, however with derogation for amounts not exceeding thresholds according to Article 48 CRR.

What comprises a significant investment in a financial sector entity is defined in Article 43 CRR. In EBA Q&A 2022_6374 it is clarified that the definition should be the basis for determining whether an investment is significant in cases it pertains to a non-financial entity as well, and it is also clarified how goodwill included in the valuation should be understood and calculated. 

Furthermore, EBA Q&A 2021_6211 provides guidance on the application in certain cases. Of relevance here is the conclusion that even if there is a supervisory permission, pursuant to Article 49(1) CRR, not to deduct holdings in insurance undertakings within the scope of conglomerate supervision according to Directive 2002/87/EC, there is still a requirement to deduct any goodwill included in the valuation of such insurance undertakings in accordance with Article 36(1)(b) and 37(b) CRR, provided the investment is significant according to Article 43 CRR.

Also, when an institution is subject to supervision on a consolidated basis, there is a derogation according to Article 49(2) CRR, whereas such institutions for the purposes of calculating own funds on an individual basis and a sub-consolidated basis shall not deduct holdings of own funds instruments issued by financial sector entities included in the scope of consolidated supervision. This derogation does not require supervisory permission, in contrast with the conglomerate related derogation according to Article 49(1) CRR, although the competent authority may still require the exempted deductions to be made.

Now, regarding cases where an individual institution has significant investments in the form of subsidiaries in other institutions or financial institutions, we have observed indications that the supervisory practices on the interplay between Articles 49(2) and 37(b) CRR differ across Member States. When calculating the own funds on an individual basis and a sub-consolidated basis, the institution holding institutions or financial institutions that are within the scope of prudential consolidation is exempted from deducting the holdings according to Article 49(2) CRR. Whereas some practices entail a literal reading of the regulatory provisions, entailing that the derogation of Article 49(2) CRR only pertains to a derogation from Article 36(1)(i), whereas significant investments in entities that are within the scope of prudential consolidation are not deducted but where it is still required that institutions, on an individual basis or sub-consolidated basis, deduct any goodwill included in the valuation of such holdings. Other practices however seem to interpret that Article 49(2) CRR is an also a derogation from the deduction of goodwill included in the valuation according to Article 37(b) CRR. 

We would appreciate clear guidance from the EBA on this matter, if the application of the derogation of Article 49(2) extends to prevent all deductions relating to such holdings that are in scope, or if Article 37(b) applies regardless, for all, in the given context, non-consolidated significant investments (that is, in essence, also on holdings in subsidiaries that are credit institutions or financial institutions when calculating own funds on a solo or sub-consolidated basis).