Focus on… Current regulatory changes

We are focused on the new EU Commission’s legislative proposal to amend the fourth Capital Requirements Directive. There are some amendments which came into this proposal at the last minute. The new Art 21.c effectively introduces a comprehensive sweeping prohibition of providing banking services cross-border and requires authorisation for third-country banks that wish to carry out any activities set out in CRD Annex I into a member state and to establish an authorised branch in each of that member state where they want to conduct business, at least where the 3rd country bank is a deposit-taking bank or a ‘class 1’ investment firm that would be treated as a bank in the EU under the Capital Requirements Regulation (CRR).

This proposal would have a significant adverse impact not only on the lending business and syndication of loans, but also on account opening and hedging; basically, on the ability of EU financial institutions, corporates, governmental entities and other individuals to access international markets and benefit from cross-border services. The intention of the EU is clearly to eliminate all these member state-specific exemptions and have one EU-wide supervision on cross-border services.

Art 21.c still mentions one exemption which quite a few non-EU banks rely on, reverse solicitation. In the context of the new Art 21.c, now the concern was raised that it is rather difficult to demonstrate and document that a transaction or relationship resulted from the ‘exclusive initiative’ of the client, particularly in cases of pre-existing client relationships and also difficult to draw to line proofing that we are not advised on any other product or follow up deal other than the original product we were asked to assist with and therefore is unlikely to allow for the effective conduct of cross-border business.

Given the wide ramifications within the banking business areas, this was discussed between various associations and lobby groups outside the firm. We presented as part of BdB and AFME some case studies where this could be a problem not only for us but also for EU corporates, who might need to conduct business with a local underwriter for non-EU listings directly or retain M&A advisors and want to emphasise that EU corporates need access to the liquidity market and service of non-EU banks. At least the ECB´s opinion to clarify the scope of the cross-border prohibition is welcome as it poses considerable uncertainty and may undermine existing business models, particularly in the post-Brexit era.

In general, the ambition of the EU legislators to amplify banking supervision within Europe is the overarching topic on many levels and business areas. It will remain a hot topic for the next couple of years and drive the development and expectation of Frankfurt building on its status as a main European banking hub.