Supervision of third country branches is undergoing a fundamental shift: BRUBEG introduces, for the first time, a uniform, risk-based framework that clearly regulates access to the European market for third-country institutions – while simultaneously forcing new strategic decisions upon them.
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In this article, we continue our BRUBEG series and take a detailed look at the new supervisory regime for third country branches (TCBs) – the key reform affecting all third-country institutions.
The previously fragmented supervisory practice within the EU will thus be harmonised, and a standalone, risk-oriented authorisation and supervisory regime for CRD third country branches will be introduced. For the first time, this creates a clearly structured regulatory framework that systematically governs EU-wide market access for third country branches. At the same time, it imposes a clearly defined new regulatory regime on these branches, which they must now implement and comply with within the specified timeframe.
Status quo and new approach
To date, third country branches have been subject exclusively to the national supervision of the respective host Member State, whereas branches from EU Member States have been integrated into a unified supervisory system via the European passport. In Germany, third country branches have so far been deemed credit institutions pursuant to the legal fiction under Section 53(1) KWG and have been subject to the general licensing requirement under Section 32 KWG.
A branch qualifies as a CRD third country branch if the institution’s head office is located in a third country and at least one of the following conditions is met:
(1) The institution would qualify as a CRR credit institution if its head office were located in the EU, and the branch conducts at least lending or guarantee business; or
(2) The branch itself conducts deposit-taking business in Germany (so-called core banking activities).
This implements Article 21c(1) CRD VI, which provides for a general prohibition on offering core banking services from third countries within the EU/EEA. Access to the European market will therefore, in future, only be possible via third country branches.
Risk classes for CRD third country branches
The new regime introduces a risk-based classification of CRD third country branches. In future, a distinction will be made between two risk classes, with differing requirements regarding capital, liquidity and organisation:
- Risk Class 1: Branches with significant market relevance, particularly where assets ≥ €5 billion, significant deposit business (>5% of liabilities or > €50 million), or where the branch does not qualify as “small and non-complex”.
- Risk Class 2: Small, non-complex and qualifying branches.
Reclassification is possible. This replaces the previously rigid system with a tiered supervisory model that aligns the intensity of regulation with the actual significance and risk profile of the branch.
Qualified CRD third country branches
Section 53cb KWG-E introduces the category of “qualified CRD third country branches”. This applies to branches whose home country supervision is recognised as equivalent to European standards.
In such cases, BaFin may grant relief, for example with regard to liquidity requirements or reporting obligations. This classification promotes alignment with European supervisory standards.
Exceptions and exemptions
Certain exemptions continue to apply under BRUBEG. However, where these do not apply, third-country institutions will generally have no alternative but to establish a CRD third country branch or – with significantly greater effort – set up an authorised EU subsidiary.
“Reverse solicitation” exemption
While the “reverse solicitation” exemption is explicitly regulated at EU level, there is no direct one-to-one implementation in BRUBEG. One possible explanation is that the exemption is already recognised in BaFin’s administrative practice; it is also referenced in the explanatory memorandum to BRUBEG.
Overall, this indicates that the “reverse solicitation” exemption is, in principle, recognised under German law and will continue to be relevant.
Exemptions under Section 2(5) KWG
Previously, third-country institutions could apply for an exemption under Section 2(5) KWG under certain conditions. With the introduction of the new regime, this option will no longer be available for the provision of core banking services.
For exemptions already granted, this has practical consequences: they must be reviewed and, where necessary, revoked. However, BaFin’s specific administrative practice and its approach to existing exemptions have not yet been conclusively clarified and remain to be seen.
Interbank and group exemptions
Unlike at EU level, BRUBEG does not contain an explicit implementation of either the interbank exemption or the group exemption:
- Interbank exemption: The explanatory memorandum clarifies that banking and financial services provided by a third-country institution to a CRR credit institution authorised in Germany do not require a licence. In practice, this means that BaFin’s existing administrative practice will continue to apply.
- Group exemption: The exemption for intra-group activities (the so-called group privilege) has likewise not been explicitly adopted. However, no explicit provision was required, as services within a group are already exempt under Section 2(1) no. 7 and Section 2(6) no. 5 KWG.
Obligation to establish a subsidiary
A particularly far-reaching innovation is set out in Section 53ci KWG. This provision enables national supervisory authorities to require CRD third country branches to establish a legally independent subsidiary, particularly in the following cases:
- Cross-border activity within the EU: Where third country branches provide core banking services in other EU Member States and neither the group exemption nor the “reverse solicitation” exemption applies.
- Systemic relevance: Indicators include, irrespective of specific thresholds, a high level of importance for the financial market or complex business activities.
- Exceeding certain thresholds: Assets ≥ €10 billion or, on a consolidated basis with other EU branches of the same group, ≥ €40 billion.
The establishment of a subsidiary may also be required where less intrusive measures are insufficient to address material supervisory concerns.
The consequences are significant: the branch must be converted into a CRR institution and comply with all regulatory requirements under the CRR, including strict capital requirements, governance structures and comprehensive reporting obligations.
Timeline and outlook
Affected institutions will benefit from a transitional period until 11 January 2027. In addition, BaFin may allow existing branch licences to continue under certain conditions, provided that the new substantive requirements are met.
The coming years will determine which third-country institutions successfully navigate the new supervisory landscape. Those who integrate the new requirements into their strategic planning at an early stage can avoid regulatory pitfalls – while efficiently accessing the European market at the same time.
BRUBEG is therefore more than just a piece of legislation: it is a compass for the future structure, risk management and competitiveness of third country branches in the EU.
