Third country branches (TCBs) are increasingly significant in EU banking markets, necessitating a common prudential framework. This framework includes a minimum capital endowment requirement that TCBs must maintain to protect local depositors in case of resolution or winding-up. The guidelines also specify suitable financial instruments that can be used to meet this requirement.
This document is a final guide entitled "Guidelines on instruments available for third country branches for unrestricted and immediate use to cover risks or losses under Article 48e(2)(c) of Directive 2013/36/EU", published by the European Banking Authority (EBA) in 2026. It concerns the capital endowment requirements of third country branches (TCBs) operating in the European Union, specifically on eligible financial instruments to cover risks or losses immediately and without restriction in accordance with Article 48e(2)(c) of Directive 2013/36/EU. The scope covers regulatory, prudential, and operational aspects related to these instruments, as well as the conditions for their implementation. The document comprises 24 pages and is addressed to competent banking supervisory authorities and concerned financial institutions.
The document addresses the need to establish a harmonized prudential framework for third country branches (TCBs) in the EU, particularly regarding the minimum capital endowment requirement. This requirement, introduced by Article 48e of Directive 2013/36/EU, obliges TCBs to maintain at all times a minimum capital available to cover risks or losses, notably in case of resolution or liquidation of the branch, in accordance with Article 96 of Directive 2014/59/EU. The objective is to protect local depositors and creditors at the branch level. The required capital is calculated as a percentage of the liabilities recorded on the branch's balance sheet, with a minimum nominal amount. Eligible instruments to satisfy this requirement include cash, debt securities issued or guaranteed by governments or central banks of EU Member States, as well as other financial instruments available for immediate and unrestricted use. The EBA, mandated by Article 48e(4), specifies in these guidelines the eligibility criteria for these other instruments, emphasizing their effective availability if needed, notably through a segregated account. The most suitable instruments are debt securities with a 0% risk weight according to the standardized approach of Regulation (EU) No 575/2013, issued or guaranteed by public entities or recognized international organizations. The guidelines also define the minimum operational conditions that TCBs must meet to ensure asset availability. These measures aim to harmonize practices within the EU, prevent regulatory arbitrage, and strengthen convergence and legal clarity. Implementation is planned from 11 January 2027, with an obligation for competent authorities to notify their compliance by 10 June 2026 (p. 3-14).
The guide was developed in response to the growing presence of third country branches (TCBs) in EU banking markets and the regulatory fragmentation observed among Member States. In 2021, an EBA report highlighted divergent practices regarding capital requirements for these entities, with some authorities not imposing a minimum endowment. To address these disparities, Directive (EU) 2024/1619 introduced a harmonized framework, notably via Article 48e of Directive 2013/36/EU, which sets a minimum capital endowment requirement. The objective is to ensure that assets dedicated to this endowment are available to cover risks or losses in case of resolution or liquidation of the branch, thus protecting local depositors and creditors. The guide aims to specify eligible financial instruments, their conditions of use, and operational modalities, notably the maintenance of a segregated account. It is addressed to competent authorities responsible for supervising TCBs and fits within a regulatory convergence and systemic risk prevention approach. The document also clarifies that these requirements are complementary to liquidity rules applicable to TCBs and that endowment assets cannot be counted towards these liquidity requirements (p. 4-6).
Capital Endowment Requirement:
- Introduced by Article 48e of Directive 2013/36/EU, this requirement obliges TCBs to maintain a minimum capital calculated as a percentage of liabilities recorded on the balance sheet, with a nominal floor amount.
- This capital must be available to cover risks or losses in case of resolution or liquidation, thus protecting local depositors and creditors (p. 3-5).
Eligible Instruments:
- Instruments must be available for immediate and unrestricted use.
- Eligible are:
a) cash or cash-equivalent instruments,
b) debt securities issued or guaranteed by central governments or central banks of EU Member States,
c) other financial instruments, notably debt securities issued or guaranteed by governments, central banks, public entities, multilateral development banks, or international organizations, provided they have a 0% risk weight according to Regulation (EU) No 575/2013.
- These instruments must be listed on a recognized market, easily monetizable, not issued by the parent company or its subsidiaries, and valued at market value (p. 11-13).
Operational Conditions:
- Assets must be deposited in a segregated account to guarantee their availability in case of resolution or liquidation.
- They must be free of any encumbrance, except those necessary to ensure availability.
- TCBs must implement mechanisms, strategies, and processes to continuously comply with this requirement.
- Endowment assets cannot be taken into account for liquidity requirements (p. 12-13).
Harmonization and Supervision:
- The guidelines aim to harmonize practices within the EU to avoid regulatory arbitrage.
- They are addressed to competent authorities who must integrate these rules into their practices and supervise their application.
- Mandatory reporting is planned to notify authorities' compliance by June 2026.
- Implementation is scheduled for 11 January 2027 (p. 8-10).
Public Consultation and Feedback:
- The consultation received seven responses, mostly favorable.
- Some requests for clarifications were integrated, notably regarding the consideration of non-EU debt securities and the need to consider the branch’s own funding currency.
- Proposals to include parent company guarantees or secured bonds were rejected because they do not guarantee immediate availability of funds in case of resolution (p. 18-24).
Cost-Benefit Analysis:
- The financial impact is limited for TCBs and authorities already aligned with similar requirements.
- For others, costs related to the establishment and monitoring of the capital endowment are expected.
- Benefits lie in enhanced protection of local depositors, prevention of regulatory arbitrage, and better convergence of practices (p. 14-17).
- Established Facts:
- The increased presence of TCBs in the EU requires a harmonized prudential framework.
- Article 48e of Directive 2013/36/EU imposes a minimum capital endowment for these entities.
- Eligible instruments must be immediately available and deposited in a segregated account.
- Endowment assets cannot be used to satisfy liquidity requirements.
- Assumptions:
- Debt securities with a 0% risk weight are the most suitable instruments to meet the requirement.
- Effective availability of assets is ensured by strict operational conditions.
- Interpretations:
- Inclusion of complex assets such as reverse repo collateral or parent company guarantees is inappropriate.
- The endowment protects local depositors in case of branch failure, even if the group is subject to other resolution regimes.
- Uncertainties:
- The precise impact on TCBs in jurisdictions without similar requirements remains to be measured.
- Financial market developments could influence liquidity and value of eligible instruments.
- The EBA recommends that TCBs comply with a minimum capital endowment composed of clearly defined financial instruments, mainly debt securities with a 0% risk weight issued or guaranteed by public entities or international organizations.
- Assets must be held in a segregated account, free of charges other than those necessary to ensure availability in case of resolution or liquidation.
- TCBs must implement operational mechanisms to ensure continuous compliance with this requirement.
- Competent authorities must integrate these guidelines into their supervisory framework and notify their compliance to the EBA before 10 June 2026.
- The implementation date of the guidelines is set for 11 January 2027.
- The EBA discourages inclusion of parent company guarantees or certain complex instruments in the endowment to ensure liquidity and immediate availability of assets.
- These measures aim to protect local depositors, ensure orderly management of TCB failures, and strengthen regulatory harmonization within the EU.
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