A law implementing, among others, Directive (EU) 2019/878 amending Directive (EU) 2013/36 (Capital Requirements Directive - CRD V) has been passed by the Austrian Parliament and Federal Council, and has been published in the Federal Gazette. CRD V (as part of the package together with Regulation (EU) 2019/876 amending Regulation (EU) 575/2013 – CRR II) aims to close regulatory gaps in the existing financial regulatory framework and, while adding prudential measures as to capital requirements, requires certain entities to comply with new licensing obligations.
On 19 May 2021 the Austrian Parliament passed a law implementing, among others, the Capital Requirements Directive - CRD V (which, together with CRR II, forms a significant reformation of the existing CRR/CRD IV regime and is also referred to as Basel IV). After passing the Federal Council on 27 May 2021, the law was published in the Federal Gazette on 28 May 2021, as the last step before its entry into force.
The law addresses a variety of European acts to be implemented into national law, inter alia, also implementing Directive (EU) 2019/879 amending Directive (EU) 2014/59 (BRRD 2), i.e. entailing specifications around determining minimum requirements for own funds and eligible liabilities (MREL), introducing the concept of resolution entities and resolution groups and endowing the resolution authority with extended moratorium powers. Moreover, it implements provisions (set by Regulation (EU) 2019/2115) incentivising investments and liquidity in SME growth markets, inter alia, by reducing administrative (and compliance) burden for issuers of financial instruments.
However, the act in particular serves to implement CRD V, which is set to further improve and harmonise the European financial supervisory framework.
1. Licensing Requirements for (mixed) financial holding companies
Certain financial holding companies and mixed financial holding companies will become subject to a new licensing requirement under the Austrian Banking Act (BWG). By that, CRD V aims to improve supervisory compliance within banking groups on a consolidated basis, for which the financial holding company is responsible (unless designated otherwise by the Austrian Financial Markets Authority (FMA), see e.g. the exceptions below).
(Mixed) financial holding companies will be required to provide the FMA with certain information, inter alia, detailing the organisation and allocation of tasks within the group, and whether they are suitable shareholders of credit institutions held as subsidiaries. Ultimately, a (mixed) financial holding company (and its management) needs to be able to ensure regulatory compliance with capital requirements, but also to prevent conflicts within the group and to ensure enforcing or implementing group wide policies and adequate risk-management (as may be set by the parent financial holding company). Certain (mixed) financial holding companies (e.g. if not participating in group management or financial decisions and if the main business activity is limited to the acquiring of participations in subsidiaries) can be exempt from the licensing requirement if the (mixed) financial holding company does not constitute a resolution entity as part of a resolution group (as provided for under BRRD 2). In such a case, however, another suitable subsidiary credit institution within the group must have been validly designated to ensure regulatory compliance on a consolidated basis.
(Mixed) financial holding companies subject to the licensing requirement need to submit an application to their consolidating supervisory authority; while this will often be the FMA for Austrian (mixed) financial holding companies, the framework allows for certain constellations in which this could be a non-Austrian authority. The FMA is granted additional supervisory rights regarding (mixed) financial holding companies.
2. EU intermediate financial holding requirement
CRD V aims to improve the supervision of EU credit institutions whose parent institution has its primary seat outside of the EU, therefore being part of a third-country group. To achieve this all EU bank subsidiaries of a third-country group with a certain total consolidated balance sheet within the EU shall be bundled within/under one consolidating entity, a single EU intermediate financial holding. The requirement of EU intermediate financial holding is aimed at assessing and supervising the (consolidated) capitalisation of a third-country group's subsidiaries operating in the EU more easily. This requirement may require a restructuring of EU bank operations of third-country groups.
3. Pillar 2 amendments
The CRD V implementing law is set to increase transparency of regulatory supervisory procedures within the context of Pillar 2 supervision. In this context the catalogue of risks, which are to be assessed in the context of the Internal Capital Adequacy Assessment Process (ICAAP) by credit institutions themselves and by the regulators (generally FMA and European Central Bank) in the context of the Supervisory Review and Evaluation Process (SREP), is adapted. Systemic risks are no longer included and will be addressed by the macroprudential framework (instead). This is expected to prevent multiple addressing of risks with the same capital.
The law also differentiates between supervisory expectations (Pillar 2 guidance (P2G)) addressing losses from advanced stress scenarios, and additional capital requirements (Pillar 2 requirement (P2R)), which is to address all other risks (incl. risks arising from baseline stress testing) which are not (sufficiently) addressed by Pillar 1 measures (i.e. capital structure). Non-compliance with a supervisory expectation may lead FMA to impose sanctions.
4. Capital Buffers and macroprudential instruments
Not only does the CRD V implementing law centralise statutory measures around microprudential supervisory instruments such as capital buffers, or macroprudential instruments or instruments combining both (such as restrictions on distribution or combined buffers), but also aims to prevent credit institutions using Pillar 2 measures to address systemic or macroprudential risks, thus aiming to prevent a double allocation of capital requirements to address (the same) risk. While the competence of the FMA to issue ordinances is reduced in cases where methods to address macroprudential risk are already regulated on a European level, the act also provides for more flexibility: on the one hand, the threshold of capital buffer requirements which can be imposed under the Austrian framework is increased before having to be greenlighted by the European Commission; on the other hand different capital buffer requirements may be mandated cumulatively (Additivität). When not complying with capital buffers in relation to the leverage ratio (as set out in CRR II), distributions may be restricted by the regulator.
5. Remuneration and governance arrangements
In accordance with CRD V, the law defines additional categories of employees whose work has a material impact on the risk profile of the credit institution. Beside members of the supervisory and managing board and staff of the senior management (i.e. Board-1), other
staff members with managerial responsibility over the institution's control functions or material business units, not yet covered by the framework, qualify as well. As a consequence, when laying out its remuneration policy incl. salary and voluntary pension payment for these categories of staff, the credit institution is required to adhere to the regulatory limitations (e.g. deferral of payments or retention requirements). Certain alleviations may apply to 'small' CRR institutions with a certain maximum balance sheet total and employees not exceeding a certain salary.
Moreover, when concluding certain legal transactions with its members of the managements and/or related parties (reaching a certain amount), a credit institution is subject to strict regulatory and diligence requirements. In addition to the already existing framework, a credit institution will now be required to document data on loans granted to members of the managing or supervisory board and their affiliated persons. This also applies if the loan is granted to a business enterprise in which one of these persons holds a stake in the share capital or voting rights (of 10 % or more), or holds a managing (or supervisory) position (incl. senior management position, Board-1), or may exert material influence.
The CRD V implementing law builds on supervisory and regulatory practice of the last years. It aims to close a range of regulatory gaps, among others, by extending supervisory compliance within a consolidated banking group to (mixed) financial holding companies through introducing licensing requirements to certain of them and by requiring third-country groups to consolidate their EU banking operations under a single EU intermediate holding company. The law harmonises the provisions centered around capital buffers and macroprudential instruments, but also addresses potential double allocation of systemic and macroprudential risk by adapting risks to be addressed by Pillar 2 measures. Moreover, the CRD V implementing law will also further refine the remuneration framework.