Pursuant to Article 33(5)(b) of LCR Commission Delegated Regulation (EU) 2015/61, only credit institutions having a ratio of consumer finance or leasing and factoring activity exceeding 80% of their total balance sheet may receive a waiver in accordance with Article 33(3) and 33(4) as provided under the LCR Commission Delegated Regulation (EU) 2015/61.

Generally, banks will have to comply with the LCR on an individual and consolidated basis. In a first scenario, imagine a bank constituting a single liquidity subgroup applying for an exemption from the cap on inflows in accordance with Article 33(3) or 33(4) of LCR Commission Delegated Regulation (EU) 2015/61 at consolidated level. In this case, the question is whether Article 33(5)(b) of the LCR Commission Delegated Regulation (EU) 2015/61 refers to the balance sheet value of the individual entities or to the consolidated total balance sheet value of the single liquidity subgroup. We note the EBA response to Q&A 2013_483 : ‘Where, in accordance with Article 8(1) of the CRR, a competent authority waives the application of liquidity requirements to an institution and to all or some of its subsidiaries, and instead supervises them as single liquidity subgroup, the liquidity subgroup in question shall comply with Part Six on the consolidated basis of that subgroup’.

In a second scenario, imagine a holding entity with some subsidiaries where the holding entity wants to apply for an exemption from the cap on inflows in accordance with Article 33(3) or 33(4) of LCR Commission Delegated Regulation (EU) 2015/61 at individual level. The holding entity, even if specialised in performing leasing and factoring or consumer finance activity, may have a ratio below 80% on an individual basis due to the fact that the balance sheet is inflated by the its shareholding in its subsidiaries (even if these subsidiaries perform the same activity) and refinancing agreements toward these subsidiaries. At consolidated level, the group will comply with the 80% threshold, and on an individual basis, all the entities of the group, apart from the holding entity, comply with the 80% threshold without the exclusion of the above mentioned elements. However, the ratio of the holding company on an individual basis would be above the 80% threshold if we excluded its shareholdings in subsidiaries and internal refinancing agreements from the calculation of the ratio. We consider that these exclusions make sense from a prudential point of view because:

- For the shareholdings in subsidiaries, the subsidiaries of the holding entity are performing the same business and the same activities as the holding entity and all of them have a ratio of main activities (as referred to in article 33(3) or article 33(4)) over total assets above 80%. From an accounting perspective, these shareholdings cannot be seen as consumer finance activity; from a prudential perspective, these are shareholdings in subsidiaries performing consumer finance activities, hence could be considered as consumer finance activities. This is also why at consolidated level and without neutralisation, the group has a much higher “main activities to total balance sheet” ratio.
- Internal refinancing agreements are credit lines granted by the holding entity to support its consumer finance subsidiaries and are accounted on-balance sheet. This is due to the fact that in the subgroup, the holding entity supports its subsidiaries in order to have only one main liquidity centre in charge of collecting liquidity for the subgroup. Those refinancing agreements are inflating the balance sheet but are due to liquidity management of the subgroup that permit each subsidiary to focus on consumer finance activities. If they did not exist, each subsidiary would have to collect its own liquidity on the market, hence decreasing the capacity of the holding entity to manage and supervise the liquidity of its subsidiaries.

Considering the abovementioned rationale and the recital 16 of the Delegated Act “…taking into account the existence of specialised business models, certain exemptions to this cap, either full or partial, should be permitted to give effect to the principle of proportionality and subject to the prior approval of the competent authorities….” we are in the view that the purpose of the 80% threshold is to ensure that only credit institutions performing activities as referred to in Article 33(3) or in Article 33(4) may receive this waiver, hence excluding the above mentioned elements for the purpose of the calculation of the ratio should be possible.