(1)

Article 18(3) of Regulation (EU) No 575/2013 covers cases of prudential consolidation of groups of undertakings that are related within the meaning of Article 22(7) of Directive 2013/34/EU of the European Parliament and of the Council (2) where a parent-subsidiary relationship does not exist. In such cases, it is necessary to determine the entity at which level the requirements of Regulation (EU) No 575/2013 are to be applied on a consolidated basis. Moreover, in those cases, the most appropriate method of prudential consolidation should be the method set out in Article 22(8) and (9) of Directive 2013/34/EU (‘aggregation method’) in line with the rules set out in that Directive.

(2)

In cases of participations in institutions or financial institutions managed by an undertaking included in the consolidation together with one or more undertakings not included in the consolidation, where proportional consolidation is required pursuant to Article 18(4) of Regulation (EU) No 575/2013, the unanimous consent of those undertakings concerning the decisions about the institution’s or financial institution’s relevant activities should be required for the application of the method of prudential consolidation set out in that provision in line with the definition of joint arrangement specified in the international accounting standards as applicable under Regulation (EC) No 1606/2002 of the European Parliament and of the Council (3).

(3)

Article 18(6), points (a) and (b), of Regulation (EU) No 575/2013 refer to the supervisory requirements for prudential consolidation in the case of significant influence over one or more institutions or financial institutions but without participation or other capital ties, and in the case where those institutions or financial institutions are placed under single management other than pursuant to a contract, memorandum or articles of association, respectively. To determine whether a situation of significant influence exists, competent authorities should take into account several indicators of significant influence. Moreover, a situation of single management should only be determined where the competent authority has concrete evidence that there is an effective coordination of the financial and operating policies of such institutions or financial institutions.

(4)

The Basel Committee on Banking Supervision (BCBS) has published Guidelines on the identification and management of step-in risk (4) which include several indicators that should be used by institutions in identifying which entities can give rise to step-in risk. According to the BCBS Guidelines, ‘step-in risk’ is the risk that an institution decides to provide financial support to an unconsolidated entity, that is not a fully or proportionately consolidated entity, that is facing stress, in the absence of, or in excess of, any contractual obligations to provide such support. Pursuant to the BCBS Guidelines, where an institution identifies that there is significant step-in risk, it needs to determine the appropriate measures based on the nature and extent of the anticipated step-in support in each case. Those measures encompass, among others, the inclusion of the entities concerned in the regulatory scope of consolidation. In line with the BCBS Guidelines, several indicators should be considered by institutions and competent authorities to conclude whether certain undertakings should be fully or proportionally consolidated pursuant to Article 18(5), Article 18(6), point (a), or Article 18(8) of Regulation (EU) No 575/2013, as applicable, taking into account the risk of step-in these undertakings may pose to an institution. Nevertheless, institutions should also consider alternative measures to address step-in risk under their risk management procedures and internal capital adequacy assessment process (ICAAP). In addition, competent authorities may consider other measures to address the potential risk posed by those undertakings under the supervisory review and evaluation processes (SREP). In the context of the large exposures framework, the European Banking Authority (EBA) has also issued guidelines on limits on exposures to shadow banking entities that carry out banking-like activities outside a regulatory framework (5), which specify the methodology that should be used by institutions to set limits, as part of their internal processes, on their individual and aggregate exposures to shadow banking entities.

(5)

In particular, in order to determine whether full or proportional consolidation is needed pursuant to Article 18(8) of Regulation (EU) No 575/2013 in the case of subsidiaries or undertakings in which an institution holds a participation where that subsidiary or undertaking is not an institution, financial institution or ancillary services undertaking, and where there is a substantial step-in risk and provided that the undertaking is not an insurance or reinsurance undertaking, or an insurance holding undertaking, among others, competent authorities should be expected to scrutinise, at a minimum, certain categories of undertakings such as special purpose entities that do not qualify as securitisation special purpose entities as defined in Article 2, point (2), of Regulation (EU) 2017/2402 of the European Parliament and of the Council (6), for which the conditions for the transfer of significant credit risk set out in Article 244 of Regulation (EU) No 575/2013 are applicable, as well as those undertakings performing any of the activities referred to in Article 89(1), point (b), of Regulation (EU) No 575/2013.

(6)

In order to ensure consistency with the own funds framework under Regulation (EU) No 575/2013 and to avoid the recognition of undue capital benefits, in those cases where consolidation is required pursuant to Article 18(3) to (6) or Article 18(8) of Regulation (EU) No 575/2013, the inclusion in the consolidated own funds of the amounts of Common Equity Tier 1 items and of the Additional Tier 1 and Tier 2 capital instruments issued by the undertakings included in the prudential scope of consolidation and owned by persons other than such undertakings, as well as the related share premium accounts, should also be based on Articles 81 to 88 of that Regulation.

(7)

This Regulation is based on the draft regulatory technical standards submitted to the Commission by the EBA.

(8)

The EBA has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (7),