knowledge 6 December 2024 |

CRD VI: Third Country Banks – Are you Ready for the New Branch Requirement?

Introduction

Significant changes are afoot at a European level with the passing of the latest Capital Requirements package in July 2024.  While that package primarily relates to the implementation of the final aspects of the international Basel III framework into European law, the European Union has also taken the opportunity to include some unrelated EU-specific changes.  These include a new obligation, primarily aimed at non-EU banks, to establish a regulated third-country-branch (“Branch”) when carrying on certain core banking activities in an EU Member State.

The Branch requirement is included in “CRD VI”.¹  Once that Directive is transposed into Irish law there will be a significant change to the Irish regulatory landscape, which is currently more facilitative of international finance than many other EU Member States.  Consequently, international lenders (and particularly banks) need to consider what steps they will take to adapt to the new rules.

What activities will require a Branch?

In-scope activities are limited to the following:

1. Lending, which is broadly defined (for example, it includes factoring)
2. Guarantees and commitments
3. Taking deposits and other repayable funds.

Each of the above is defined by reference to the list of banking activities that can be ‘passported’ throughout the EU.²  The most significant of the above activities for the Irish finance market is likely to be lending.

What types of entities are subject to the Branch requirement?

Any third country undertaking that wishes to take deposits or other repayable funds from EU customers is in-scope. 

More impactfully, any third country undertaking that would qualify as a “credit institution” (typically a bank) if it was established in the EU, which carries on the activity of “lending” or “guarantees and commitments”. 

Are there exemptions?

There are some limited but important exemptions from the Branch requirement for:

1. “reverse solicitation” (ie where an EU customer approaches the third-country undertaking on its own exclusive initiative);
2. inter-bank arrangements;
3. intra- group arrangements;
4. activities that are accommodating ancillary services (eg deposit-taking or the provision of credit) for MIFID II investment services;
5. pre-existing contracts entered into before 11 July 2026 (in order to preserve the customer’s acquired rights).

The precise scope of each of the above exemptions – for example how closely related an ancillary banking service needs to be to the MIFID II investment service, or whether amendments to pre-11 July 2026 contracts can benefit from the exemption – is not prescribed by CRD VI.  Consequently, it will be important to keep under review the technical standards and guidance from the EU authorities (particularly the EBA) as those are published in the course of implementing the revised CRD VI framework.

Timeline

The key upcoming dates are as follows:

 

10 January 2026	EU Member States, including Ireland, must have transposed CRD VI into national law.  Subject to specified exceptions, CRD VI requirements come into effect the following day (11 January 2026).
10 July 2026	EBA to issue guidelines outlining information, procedures and conditions relevant to authorisation as a Branch. The grace period for entry into contracts without authorisation as a Branch expires.
11 January 2027	Measures requiring authorisation as a Branch come into effect.

For any non-EU bank that carries on core banking activities in the EU, it is important to consider at an early stage what steps should be taken, particularly if the intention may be to apply for a regulatory authorisation. 

What are the options?

As mentioned, the introduction of the Branch requirement for lending and other core banking activities will be a significant change to the Irish regulatory system.  Affected entities will need to consider this in detail but at a high level three options present themselves:

Authorisation as a Branch

While this is implicitly the default option under CRD VI it may not be an attractive one in an Irish context.  Obtaining authorisation as a branch would require a relatively significant investment of resources into the authorisation process as well as ongoing compliance with capital, liquidity, governance, booking and other supervisory requirements. 

This option may be more attractive in other EU Member States which already require a third-country branch.  However, even in those countries a significant investment of time and resources is likely to be required to ensure that the existing branch authorisation is ‘grandfathered’ (if the Member State permits that) and that the new CRD VI minimum requirements are met.

In any event, a crucially important point to bear in mind is that, in keeping with the current position, a Branch will not have the ability to passport its authorisation to other EU Member States.

Authorisation as an EU Credit Institution

For third-country undertakings that conduct a high volume of business in the EU, it is worth considering establishing an EU credit institution.  This could be done by incorporating an Irish subsidiary company, which applies to the Central Bank of Ireland for authorisation. 

While obtaining authorisation as an EU credit institution would require significant investment, the ability to passport that authorisation throughout the EU may still make this approach attractive, particularly if the alternative is to have a number of separate (non-passporting) Branches in EU Member States.

Restructure to use a non-bank entity

One curious effect of the new requirement for a Branch may be to motivate international banks to move their “lending” activities into related entities that are not banks.  As noted above, the Branch requirement only arises in relation to those activities where a third country undertaking would qualify as a “credit institution” (typically a bank) if it was established in the EU.  Provided such a related entity does not take deposits or other repayable funds from the public, it is unlikely to qualify as a “credit institution”.

Where this is a practical option from the perspective of the home country of a third country bank, it would provide a pragmatic solution for the continuation of lending and guarantee/commitment activities in Ireland. 

Final Thoughts

CRD VI is introducing a significant change to regulatory authorisation requirements for third country banks doing business in Europe.  Those changes can all be navigated in a commercially sensible and proper way.  However, some solutions, particularly obtaining authorisation as a Branch or as an EU credit institution, require a significant lead-in-time so it is important that affected businesses consider these changes and start to address them now.

If you have any questions about any of the developments mentioned in this briefing, please get in touch with one of the below key contacts, or your usual contact at McCann FitzGerald LLP.