In some circumstances, non-EU banks must establish a regulated EU branch (a so-called “third country branch” or TCB) or subsidiary to provide services to EU entities. The EBA has considered whether or not to extend the so-called “interbank” exemption from the TCB requirement when third country banks provide core banking services to non-bank EU financial sector entities. The EBA has decided not to do so, raising a number of compliance issues especially for non-EU custodians and payment services firms and their clients. This note follows on from our briefing note, EBA’s draft regulatory technical standards elaborate on requirements for EU branches of non-EU banks.
Background
Articles 21c and 47 of Directive 2013/36/EU (CRD), inserted by CRD VI (Directive 2024/1619), require that third- country institutions seeking to provide core banking services (deposit-taking, lending, guarantees and commitments) into the EU must establish a TCB and apply for authorization. Some flexibility is granted, however, through exemptions and carve-outs, which permit direct provision of those services by a third-country institution in the following circumstances:
- Reverse solicitation, allowing an EU client to approach the third- country institution on its own exclusive initiative
- An inter-bank exemption, where the EU client is itself a credit institution;
- An intra-group exemption, where the third- country institution and the EU client belong to the same group;
- Grandfathering for contracts in place before July 11, 2026
- An exclusion from the requirement where the activity is an investment activity under the revised Markets in Financial Instruments Directive (Directive 2014/65/EU, MiFID II), or an ancillary service related to that investment activity, including if the ancillary service is deposit-taking or lending
Financial sector entities—no further flexibility offered
Article 21c(6) required the EBA to deliver, by July 10, 2025, a report on whether the provision of core banking services to EU “financial sector entities” (FSEs), which is a broader term than “credit institutions”, should also benefit from the existing inter-bank exemption for credit institutions, taking into account financial stability and competitiveness concerns. It was not clear on the face of CRD VI what the scope of FSEs might cover, though ultimately the EBA chose to follow the existing definition as set out in the amended Capital Requirements Regulation (575/2013). For these purposes, FSEs include: investment firms; insurers and reinsurers; payment and e-money firms; asset managers; issuers of asset-referenced tokens; and providers of crypto-asset services.
While gathering evidence for the report, the EBA’s attention was drawn to the potential negative impacts of extending the Article 21c TCB requirement. In particular, concerns were raised about the potential impact on non-bank payment service providers (PSPs), which feared increased costs or delays in execution when clearing foreign currency payments (particularly in USD) if an EU intermediary had to be added to the payment chain. In addition, the provision of custody services by non-EU global custodians, including through sub-custodian arrangements, would potentially be captured where related core banking services such as cash accounts, overdrafts or settlement credit were provided.
Notwithstanding the concerns raised, the EBA has not recommended the introduction of a broader exemption for FSEs. The report finds that there is sufficient flexibility within the existing Article 21c framework for FSEs to obtain services directly from third-country institutions through the existing exemptions and carve- outs (such as reverse solicitation) or via receipt of services from a TCB or EU subsidiary. The EBA acknowledges, though, that its assessment was based on limited quantitative and anecdotal evidence on the actual impact on competitiveness for EU FSEs, and it may need to conduct further monitoring.
Clarification on custody and safekeeping
In response to industry concerns raised around custody, the report clarifies the following:
- Where custody is ancillary to a MiFID II investment service (i.e. those listed in Section A, Annex I MiFID II), any related deposit-taking or granting of loans is exempt, so Article 21c does not bite.;
- Stand-alone custody is different. If custody is provided without an accompanying MiFID investment service, any linked deposit or credit facility would not fall within the MiFID exemption.
This would mean that existing stand-alone custody structures where a non-EU custodian provides deposit accounts or lending to EU clients will need to rely on another exemption (such as reverse solicitation) to avoid triggering Article 21c.
This is seemingly inconsistent with a European Commission transposition Q&A on CRD VI, which implied that standalone custody (which necessarily involves the provision of a securities and cash account i.e. a deposit and granting of credits on such account) would not trigger Article 21c. Certain member states seem to have followed that interpretation in their draft transposing legislation, clearly exempting core banking services that are ancillary to services and activities under Section A and B, Annex I MiFID II (for example, the Netherlands).
Interaction with UCITS and AIFMD
The CRD VI text does not expressly address its interaction with rules under the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) and the Undertakings for Collective Investment in Transferable Securities Directive (Directive 2009/65/EC) that allow the direct provision of core banking services by third country banks; namely: (i) eligible deposits in non-EU banks; (ii) cash accounts with third- country institutions; and (iii) delegation of safekeeping to sub-custodians where this also entails the provision of core banking services. The EBA suggests using the supervisory Q&A process to give operational guidance in these areas.
Key takeaways
In sum, no additional flexibility is expected for the direct provision of services to EU FSEs by third- country institutions, with the effect that cross-border banking and potentially some custody services will need to be provided on a branch-or-subsidiary model, with carefully delimited exceptions. Firms in the EU and third country entities should use the transitional window to consider the entities that they deal with, structures, document exemptions and, where necessary, negotiate alternative EU-based arrangements well before the January 11, 2027 deadline.