12. Title 12. Assessing third-country branches

This title addresses the application of the SREP procedures and methodology as specified in these guidelines in relation to third-country branches (TCBs) as defined in Article 47(3) of Directive 2013/36/EU. It also addresses the application by competent authorities of supervisory measures to address deficiencies identified through the SREP assessment of TCBs.

When performing the SREP assessment for TCBs, competent authorities should evaluate inter alia the compliance of the institution with the legal acts published separately on the EBA website as referred to in paragraph 12.

The SREP assessment of a TCB should include an assessment of the branch’s business model, internal governance arrangements and controls, capital endowment and liquidity resources and booking arrangements (the SREP elements for TCBs). In line with the supervisory review and evaluation process for credit institutions (the SREP for credit institutions), the assessment of these areas should be conducted on a continuous basis and accompanied by ongoing monitoring of key indicators.

The review should be conducted with a level of frequency and intensity that is proportionate to the TCB’s classification as class 1 or class 2 in accordance with Article 48a of Directive 2013/36/EU and the nature, scale, and complexity of the TCBs’ activities. For class 1 TCBs, competent authorities should apply at a minimum the level of supervisory engagement for category 3 institutions as set out in table 1 of section 2.4. For class 2 TCBs, competent authorities should apply at a minimum the level of supervisory engagement for category 4 institutions as set out in table 1 of section 2.4.

In addition to assessing the core SREP elements for TCBs, competent authorities should ensure they understand the branch’s other material risks and how these are mitigated. This includes any significant exposures to credit risk, market risk, operational risk and IRRBB. Competent authorities may deem it appropriate to perform a more in-depth assessment of one or more of these areas based on the relevance and materiality of the risk for the TCB. In such cases, competent authorities should use the guidance in the relevant corresponding titles of these Guidelines as the basis for the assessment and seek to apply the principles contained in a manner proportionate to the TCB.

Where competent authorities exercise their right in accordance with Article 48a of Directive 2013/36/EU to subject the TCB to requirements for credit institutions in accordance with the Directive, effectively treating the TCB as a subsidiary, competent authorities should apply the SREP for credit institutions to the TCB in question and refer to the relevant titles of these Guidelines (Titles 2, 3, 4, 5, 6, 7, 8, 9, 10, and 11, as well as section 12.1.2 of this section, on business model analysis).

Competent authorities should use the findings from the assessment of the individual SREP elements for TCBs to score each area. The competent authority should use this analysis to form an overall assessment and score for the TCB and use the considerations in table 21 as a guide in this regard. The overall assessment and score should also take account of the assessment and scoring of the TCB’s other material risks (where applicable). Based on the overall SREP assessment and the assessment of the individual SREP elements for TCBs, competent authorities should take supervisory measures as specified in section 12.2 of this title to address any deficiencies identified.

12.1.1. General considerations

12.2. Summary of findings, scoring and supervisory measures

The table below presents a non-exhaustive list of sub-categories for credit risk that competent authorities should consider when relevant.

Credit risk sub- Legal references related to the Legal references/Definitions Assessment areas

The table below presents a non-exhaustive list of sub-categories for market risk that competent authorities should consider when relevant.

Market risk sub- Legal references/Definitions⁶³

⁶³ In this table, we refer to ‘Pre-Fundamental Review of the Trading Book (FRTB)’ for the definition and treatment applicable before the FRTB comes into effect. Post-FRTB refers to the definitions and approach applicable once the FRTB comes into effect.

The table below presents a non-exhaustive list of sub-categories for operational risk that competent authorities should consider when relevant.

Operational risk sub- Operational risk sub-Legal references/Definitions Legal references/Definitions

The table below presents a non-exhaustive list of sub-categories for IRRBB that competent authorities should consider when relevant.

IRRBB sub-Legal references/Definitions IRRBB sub-categories (level 2) Legal references/Definitions

P2R for transfer pricing risk should be determined by summing up the P2R corresponding to the risk linked to each transfer pricing arrangement (TPA) that is based on the transaction profit-method (TPM) as referred to in paragraph 173 of these Guidelines. Other types of TPA, similarly transferring material losses to the EU entity, should be assessed in a similar way. P2R corresponding to a TPA belonging to the set TPM should be determined as follows:

• a) The institution should identify the portfolio whose profits and losses are used as a basis to determine the amount to be allocated to the institution in accordance with the TPA.
• b) On the basis of (i) empirical evidence and (ii) key-metrics included in the pricing arrangement as referred to in paragraph 1743, point (b), of these Guidelines, the institution should determine its marginal contribution ‘m’ to the key metrics used to determine the portion of profits and losses to be allocated across the entities taking part to the TPA.
• c) The institution should obtain the market risk capital requirements ( C_MRPortfolio ) relating to the portfolio identified in point (a).
• d) The P2R for the transfer pricing arrangement is m × C_MRPortfolio . This may be capped by the maximum loss that can be allocated to the institution in accordance with the TPA.

An institution may be provided with C_MRPortfolio by an entity established outside of the Union with which there is the TPA. That entity may provide the capital requirements on the basis of the rules for market risk applicable in the jurisdiction where it is established. Where those third country provisions are based on a Pillar 1 capital framework that is not in line with the Pillar 1 market risk capital framework implemented in the EU in accordance with Regulation (EU) 575/2013, competent authorities should increase the requirement by a factor of 1.5. Competent authorities can lower or increase that multiplier to reflect the materiality of the differences in the market risk rules between the EU and the third country.

Competent authorities may set the P2R of a transfer pricing arrangement to a lower value than the one obtained in accordance with the first paragraph of this Annex when all the below conditions are met:

• a. In the context of that TPA, the institution is assessed to hold and manage most of the market risk relating to the portfolio on which the transfer pricing arrangement is based;
• b. The booking model implies that the institution may allocate its trading book losses to other entities taking part to the transfer pricing arrangement;
• c. The institution provides sufficient evidence that, in light of its role as main contributor to the TPA in the sense of point (a), the capital requirements for market risk relating to the positions that are subject to the TPA already cover for potential losses resulting from the TPA. FINAL REPORT ON THE REVISED SREP GUIDELINES