Refresher: EU Capital Requirements Directive 6 (“crd6”) – What Cross-border Financial Institutions Need to Know

Many US and other non-EU financial institutions which lend or undertake trade finance business on a cross border basis into Europe do so in reliance upon exemptions under local law.  These exemptions typically permit these non-EU entities to undertake such business without the need to obtain authorisation or licence from the local regulator (the “national competent authority”) and/or maintain a branch or subsidiary in the relevant EU member state.

CRD6 came into force on 9 July 2024 with staggered implementation.  It will impose a new licencing regime for “core banking activities”, the full provisions of which will need to be transposed into national law and come into effect on 11 January 2027.  This new regime will have extraterritorial effect and, subject to certain limited exemptions, will require non-EU financial institutions (e.g. US and Asian banks) providing core banking activities to establish branches in the EU and obtain authorisation from the relevant national competent authority.  This harmonisation of rules across the EU under CRD6 will mean that existing exemptions for commercial lending and trade finance activities in individual EU member states will to a large extent be replaced with the new EU-wide licencing regime.

Non-EU institutions which are required to establish branches will be subject to capital, liquidity and other prudential requirements.  Non-EU financial institutions with existing branches in the EU may opt to convert these into subsidiaries in order to provide core banking activities cross border into other member states using the CRD passport.

What are the new rules under the licencing regime in CRD6?

Unless an exemption applies, under Article 21c (see also Article 47(1)) of CRD6, in-scope non-EU financial institutions will be required to seek authorisation and establish a branch in the relevant EU member state before commencing or continuing “core banking activities”.  National competent authorities will also have powers to require the establishment of a subsidiary instead of a branch.

Core banking activities are defined to include:

• lending, including consumer credit, credit agreements relating to immovable property, factoring (with or without recourse), financing of commercial transactions (including forfeiting);
• guarantees and commitments; and
• taking deposits and other repayable funds*.

*There remains ambiguity as to how taking deposits and other repayable funds will be interpreted under the local laws of individual members states, e.g. whether this would include custody services or the issuance of capital markets instruments (each of which currently benefit from exemptions in certain member states).

Which non-EU entities fall into scope of these new rules?

The new licencing regime applies to non-EU entities which would meet the criteria for “credit institutions” under the EU Capital Requirements Regulation (“CRR”) if they were an EU entity (this definition will also include systemic large investment firms which are not banks). 
Credit institutions are defined under CRR as a business which consists of any of the following:

• taking deposits or other repayable funds from the public and grant credits for its own account (most non-EU deposit taking banks will fall into this category, even if they do not take deposits in Europe); and/or
• which carries out the EU MIFID II investment activities of dealing on own account (i.e. trading against proprietary capital in securities, derivatives and other MIFID financial instruments) or the underwriting or placement of securities, derivatives and other MIFID financial instruments (on an individual entity basis or as part of a group), in each case:
• where the total value of the consolidated assets (in or outside the EU) is equal to or exceeds EUR30 billion; and/or
• where the total value of the MIFID II investment activities undertaken on an individual entity or group basis is equal to or exceeds EUR30 billion.

The above thresholds do not apply to the business of taking deposits and other repayable funds, which are caught irrespective of the size of the credit institution.  The legal interpretation amongst EU member states of taking deposits and other repayable funds will be a key area of consideration for financial institutions falling within scope who issue debt securities and currently rely on national law exemptions for this activity.   

Credit institutions falling within scope will exclude any entities which fall into the following categories:

• a commodity and emission allowance dealer; or
• an insurance undertaking; or
• a collective investment undertaking (in broad terms, these entities are mainly UCITS/alternative investment funds (AIFs), the characteristics of which include raising capital from investors for investment, not commercial purposes, with a view to generating a pooled return for those investors in accordance with a defined investment policy).

However, for all other core banking activities, it is clear that the rules are targeted at large banks (>EUR30 bn) and will exclude non-EU funds and non-EU insurance and reinsurance companies lending into the EU.   

What exemptions will apply to the licencing requirement?

The requirement to establish a branch in the relevant EU member state will not apply in the following circumstances:

• Grandfathering of existing financings:Contracts to provide core banking activities which were executed prior to 11 July 2026 will fall outside of the licencing requirements.  This means non-EU credit institutions will be able to continue to provide services relating to these arrangements without the need for a licence after 11 January 2027.  Whilst no guidance has been provided, it is unlikely that renewals or extensions of grandfathered contracts will be permitted.
• Reverse Solicitation: This occurs where the EU based client requests the core banking services itself and approaches the non-EU credit institution “at its own exclusive initiative”. For this exemption to apply, the non-EU credit institution cannot market or solicit the core banking activities, nor can it instruct another person or entity (acting on its behalf) to market or solicit the core banking activities. The request for the provision of the core banking activity must be initiated by the EU based client itself.  Following this initiative by the EU based client, the non-EU credit institution is only permitted to market and solicit “any services, activities or products necessary for, or closely related to the provision of the service, product or activity originally solicited by the client”.
• Ancillary activities to MIFID investment services: Core banking activities which are provided by a non-EU credit institution to an EU-based client, where such activities are ancillary to a MIFID investment service provided to that client (e.g. trading, placement or underwriting of securities) are excluded from CRD6.  In practice, this exemption will not be beneficial to most non-EU credit institutions as the provision of such investment services requires separate authorisation/licencing under MIFID.
• Bank to Bank lending: Lending and other core banking services provided by a non-EU credit institution to an EU credit institution are exempted under the rules. The regulation will not impact interbank lending/treasury transactions.  However, such transaction may fall within scope of other EU regulations.
• Intra-group transactions: Under this exemption, activities undertaken with members of the same group as the non-EU credit institution will fall outside of scope of CRD6.

When are “core banking activities” treated as being performed in the relevant EU member state?

There is no clarity in CRD6 on when activities will be treated as being performed “in” an EU member state.  As such, in the absence of further guidance from the European Banking Authority, this may lead to a fragmentation of approach amongst the member state.  For example, where a US bank lends to a borrower incorporated in Spain and undertakes all of the lending activity in the US with no travel to Spain, does the core banking activity take place in a member state?

When do the new rules under CRD6 come into effect?

CRD6 came into force in July 2024, but a staggered approach will be taken to the implementation of the third country branch requirements.  A list of some of the key dates are included below:

• EU member states have until 10 January 2026 to transpose CRD6 into national law.
• Any contracts for the provision of core banking activities will cease to benefit from exemption for grandfathering from 11 July 2026.
• By 11 January 2027, all provisions relating to non-EU credit institutions establishing third country branches under CRD6 will need to be transposed into national law and be operative.
• Norway, Iceland and Lichtenstein as members of the European Economic Area (EEA) are also expected to transpose CRD6 into national law.

What are next steps for US and other non-EU firms?

• A scoping exercise will be necessary to determine whether or not your institution (or its affiliates) falls within scope of CRD6 as a consequence of its EU lending and other core banking activities.
• Non-EU firms should undertake an assessment of whether there are any exemptions on which they may rely  Note that in practice, there will be limited legal and commercial scope for non-EU entities to transfer their EU core banking activities into entities within the group which fall outside the definition of “credit institution” as described above.
• A review of alternative financing methods where your institution would not operate as the lender of record but still obtain exposure to EU based borrowers (e.g. funded or unfunded sub-participations, credit derivatives etc.).If licencing is required, a review of which EU member states a branch (or subsidiary) should be established in will be a key consideration.