European Banking Authority Consults on Prudential Consolidation Methods

The European Banking Authority has launched a consultation on the draft Regulatory Technical Standards on the methods of prudential consolidation under the Capital Requirements Regulation. The CRR provides that banks, investment firms, financial institutions and, when certain criteria apply, ancillary services undertakings, fall within the scope of the prudential consolidation framework. Banks and investment firms are required to fully consolidate all subsidiaries that are banks, investment firms and financial institutions. Different methods of consolidation, such as proportional consolidation, the equity method or the aggregation method, are allowed as an alternative to full consolidation.

The proposed draft RTS set out conditions and indicators for the application of different methods of consolidation. The proposed draft RTS also include indicators for banks and investment firms to use to identify undertakings that could lead to step-in risk. The inclusion of these indicators is a result of the publication by the Basel Committee on Banking Standards on October 25, 2017 of final Guidelines on the identification and management of step-in risk. Step-in risk is the risk that a bank decides to provide financial support to an unconsolidated entity that is under stress in the absence of, or in excess of, any contractual obligations to do so. The indicators in the proposed draft RTS are limited in scope because the purpose of the RTS is to establish methods of prudential consolidation under a Pillar I approach whereas the Basel Guidelines follow a Pillar II approach. It is proposed that national regulators should consider the conditions and indicators set out in the proposed draft RTS to decide on the appropriate method of consolidation for a firm.

The consultation closes on February 9, 2018. Final draft RTS for submission to the Commission will be prepared on the basis of feedback to the consultation. The European Commission will then consider whether to adopt the final draft RTS.

View the consultation paper.

View the Basel Committee's Guidelines on the identification and management of step-in risk.