Baft (Bankers Association for Finance and Trade) and other industry bodies have urged EU member states to be consistent in implementing the Capital Requirements Directive (CRD) 6 to avoid disrupting cross-border financial services.
CRD6 is the latest iteration of the directive that requires banks and investment companies to put aside capital as insulation against financial shocks, and will ensure EU firms are aligned with outstanding aspects of Basel 3.
Previously, banks headquartered in non-EU countries could provide services like loans and guarantees in the EU without a physical presence by relying on cross-border waivers.
But changes under the regulation will bring in the branch requirement, meaning that third-country banks and large investment firms must operate through locally licensed branches, unless an exemption applies.
The European Commission published CRD6 in June 2024, and the directive must be transposed into the national law of each EU member state by 10 January 2026. The branch requirement will enter into force from 11 January 2027.
Yet some countries’ proposed legislation differs from the CRD6 text in “several significant areas relating to the branch requirement” and the activities that are exempt from it, the industry groups say.
Alongside Baft, the position paper is supported by UK Finance, the Bank Policy Institute, the Swiss Finance Council, the Loan Market Association, the Association of Foreign Banks and the Japanese Bankers Association.
“A national transposition of the branch requirement that omits or unduly narrows these exemptions and carve-outs is not aligned with the intended scope” and would “introduce uncertainty and unnecessary risk to the stability of the local banking market”, the paper says.
The exemption covers core banking activities that involve inter-bank business, intragroup business or reverse-solicited business – where a client contacts a firm first.
It also applies to core banking services, including ancillary services like taking deposits or granting loans, related to the Markets in Financial Instruments Directive (Mifid).
“We would advocate that all member states ensure that they faithfully transpose the branch requirement in this regard, ensuring that core banking services connected with Mifid services are exempt,” the paper says.
The branch requirement also does not apply to existing contracts entered into before 11 July 2026.
Custody services, which enable corporates and institutional investors to hold international assets and settle cross-border transactions, could be particularly at risk if member states’ legislation is imprecise.
“Lending by custodians is an intrinsic part of transaction settlement and, therefore, integral to the smooth functioning of capital markets,” the paper notes.
Other consequences of a fragmented system could be interruptions in banking services for EU clients, higher costs for service recipients and fragmentation of liquidity pools.
There is also the risk that European recipients of third-country core banking services could move out of jurisdictions with reduced flexibility, the paper adds.
In response, the industry groups have recommended that ambiguities over the exemptions be clarified.
For example, they argue the follow-on right in reverse solicitation – which covers products or services that are closely related to those initially requested by the client – should be explicitly referenced.
The associations’ position paper includes sample text to make sure member states harmonise the regulation of cross-border banking services and avoid “gold-plating” the legislation.
Uncertainty over CRD6 is the latest challenge arising in the EU’s implementation of the Basel framework.
Banks last year were spared what they said was a potentially significant blow to trade finance when the EU decided not to implement parts of the framework that would have more than doubled capital treatment for off-balance sheet trade finance instruments.
