Question ID
2013_516
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Credit risk
Article
153
Paragraph
2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Not applicable
Article/Paragraph
na
Type of submitter
Credit institution
Subject matter
Definition of unregulated financial sector entities
Question

In applying the 1.25 co-efficient specified under Article 153(2) of Regulation (EU) No 575/2013, what is that definition of "unregulated financial sector entities"?

Background on the question

The definition of unregulated financial entity given in Article 142(5) of Regulation (EU) No 575/2013 (CRR) implies that any financial entity which is not subject to the prudential regulation that is at least equivalent to those applied in the Union should be treated as unregulated financial entity. Thus, the definition of “unregulated financial entity” is so broad that it also includes banks that operates in countries that have no equivalent supervision (e.g. Russia, China, etc). Moreover most of the non-bank financial entities such as leasing and factoring companies that are operating within the Union also would be treated as unregulated since they are not subject to CRR. Assuming that this item targets completely unregulated financial institutions (hedge funds, etc), we'd appreciate if you could provide additional guidance on the treatment of partially regulated financial institutions (e.g. leasing, factoring, forfaiting companies, securities institutions etc) and of banks outside of the Union.

Submission date
Final publishing date
Final answer

The term 'unregulated financial sector entity' in Article 153(2) of Regulation (EU) No 575/2013 (CRR) is not limited to entities that are "completely unregulated". It also applies to financial sector entities that are subject to prudential supervisory and regulatory requirements which are not deemed to be at least equivalent to those applied in the Union.

This follows from the following considerations:

The definition of a 'large financial sector entity' in Article 142(1)(4) of the CRR only applies to financial sector entities as defined in Article 4(1)(27), provided that both the 'prudential regulation condition' in Article 142(1)(4)(b) and the 'size condition' in Article 142(1)(4)(a) are met. In other words, this definition is only applicable to large 'prudentially regulated' financial sector entities and those which are not directly 'prudentially regulated' but with at least one 'prudentially regulated' subsidiary.

By contrast, the definition of an 'unregulated financial sector entity' in Article 142(1)(5) of the CRR is applicable to any entities which are neither directly 'prudentially regulated' nor have at least one 'prudentially regulated' subsidiary, provided that they perform, as their main business, one or more of the activities listed in Annex I to Directive 2013/36/EU or in Annex I to Directive 2004/39/EC.

Consequently, the requirement in Article 153(2) of the CRR to multiply the coefficient of correlation by 1.25 applies only to exposures to 'prudentially regulated' financial sector entities which meet the 'size condition' in Article 142(1)(4)(a) of the CRR, and to all entities which meet both of the following conditions:

a)            they perform, as their main business, one or more of the activities listed in Annex I to Directive 2013/36/EU, or in Annex I to Directive 2004/39/EC; and
b)            they do not meet the 'prudential regulation condition' of Article 142(1)(4)(b) of the CRR.

It is worth noting that the 'prudential regulation condition' in Article 142(1)(4)(b) of the CRR is not limited to the CRR and the national transposition of Directive 2013/36/EU.  As an illustration, this condition can also be met where, in a Member State, financial institutions (to which the CRR is not applicable) are subject to prudential and supervisory requirements equivalent to those applied to institutions.

See further Q&A 211.

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.
Note to Q&A

Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).

Disclaimer

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