The report outlines a prudential consolidation framework under the Capital Requirements Regulation (CRR), explaining its objectives and regulatory provisions. It also addresses the definition of 'undertaking', the notion of 'control', and 'financial institution', while making recommendations to the Commission. Lastly, the document discusses exemptions and sub-consolidation regimes, as well as application issues…
This document is a report published by the European Banking Authority (EBA) in January 2026, entitled “Report on prudential consolidation” (EBA/REP/2026/01). It concerns the assessment of the European regulatory framework relating to prudential consolidation of banking groups, pursuant to Article 18(10) of the Capital Requirements Regulation (CRR). The scope covers definitions, methods, and provisions applicable to prudential consolidation within the European Union, based on a quantitative and qualitative analysis conducted with 70 banking institutions from 26 EU/EEA countries, including systemic institutions (G-SII, O-SII) and non-systemic banking groups, with data as of 31 December 2023. The report focuses on the first 39 pages provided, approximately half of the total 98-page document.
The EBA report assesses the robustness and effectiveness of the European prudential consolidation framework, essential for consolidated supervision of banking groups and group-wide risk management. This framework determines the scope and consolidation methods of entities within groups, ensuring a comprehensive view of risks, avoiding double counting of own funds, and limiting regulatory arbitrage. The study reveals that the framework is overall robust and appropriate, notably thanks to recent amendments introduced by CRR3 which improved clarity and risk coverage. However, interpretation divergences and operational complexities remain, particularly regarding alignment between accounting and prudential consolidation, the definition of “undertakings” (entities), control, and the treatment of ancillary or special entities (ASU, SSPE, CIU). The report identifies gaps mainly related to the treatment of insurance entities and differing consolidation methods (proportional vs equity). It recommends examining greater harmonization between accounting and prudential perimeters while preserving prudential objectives, and clarifying key definitions to reduce application divergences. Targeted recommendations are made to improve coherence, efficiency, and proportionality of the framework, notably: (1) launch a targeted review to align accounting and prudential perimeters; (2) restrict the application of the equity method to cases where no consolidated carrying amount exists; (3) introduce a clear and operational definition of “undertaking” based on control regardless of legal form; (4) integrate consideration of long and severe restrictions in control assessment; (5) broaden the scope of step-in risk; (6) include pension fund management companies in the definition of financial institution; (7) clarify the treatment of SSPEs within the leverage ratio framework; (8) specify the application of sub-consolidation requirements; (9) introduce an exemption regime for sub-consolidation; (10) limit sub-consolidation to holdings that must be consolidated. The report finally stresses the need for harmonized implementation and ongoing monitoring, notably in view of business model evolutions and digitalization, to ensure effective consolidated supervision adapted to emerging risks (p. 9-21).
The report responds to the mandate of Article 18(10) of the CRR which requires the EBA to assess the completeness and adequacy of definitions and provisions relating to prudential consolidation within the European regulatory framework. The objective is to identify potential gaps, interpretation divergences, unintended constraints, or regulatory arbitrage risks linked to definitions and consolidation methods. The report aims to provide the European Commission with elements for possible legislative proposals to improve the framework. It relies on quantitative and qualitative data collection from a representative sample of 70 banking institutions, including various profiles and group structures, to analyze actual consolidation practices and deviations from accounting standards. The report covers key framework themes: consolidation perimeter, definition of “undertaking”, notion of control, definition of financial institution, treatment of ancillary entities (ASU), specialized vehicles (SSPE, SPV-SEC), collective investment undertakings (CIU), as well as exemption and sub-consolidation regimes. It aims to promote harmonization, convergence of practices, and proportionality in the application of prudential rules (p. 22-29).
- Consolidation perimeter: The prudential perimeter is overall aligned with the accounting perimeter, except for insurance entities excluded from the prudential perimeter under Article 18(7) of the CRR. Some divergences also arise from exemption regimes, exclusion of non-financial entities (real estate, operating leasing), and differing consolidation methods (proportional vs equity). A trend was observed in some institutions to voluntarily align accounting and prudential perimeters to simplify processes, although this is not compliant with current rules. The EBA recommends assessing the feasibility of a more systematic alignment while preserving prudential objectives (p. 30-36).
- Definition of “undertaking”: The absence of an explicit definition in the CRR leads to divergent interpretations, some institutions limiting the notion to entities listed in accounting directive annexes, thus excluding controlled entities not subject to these standards (e.g., partnerships, associations). The EBA advocates a clear and operational definition based on effective control, regardless of legal form or accounting obligations, to ensure complete and consistent consolidation (p. 37-41).
- Notion of control: The revised definition in CRR3 improves alignment between accounting and prudential frameworks by integrating IFRS and the accounting directive. However, difficulties remain, notably regarding the consideration of long and severe restrictions limiting effective control, and treatment of jointly controlled entities. The EBA recommends explicitly integrating these situations in control assessment to avoid inappropriate inclusions in the perimeter (p. 42-43).
- Definition of financial institution: The definition is generally well applied, reinforced by CRR3 amendments. Uncertainties remain on determining main activity, inclusion of regulated or non-regulated entities, and qualification of pension fund management companies. The EBA recommends clarifying the notion of main activity based on the definition of financial holding companies and explicitly including pension fund managers in the definition of financial institution (p. 15-16).
- Ancillary service entities (ASU): The updated definition by CRR3 and EBA guidelines bring better coherence and reduce interpretation divergences, notably for operating leasing, real estate management, and data processing activities. These tools aim to ensure prudent and harmonized classification of ASU (p. 17-18).
- Specialized vehicles (SSPE, SPV-SEC) and collective investment undertakings (CIU): SSPEs are explicitly excluded from the definition of financial institution, consistent with their nature. However, difficulties arise in securitization cases where prudential consolidation may diverge from accounting practices, notably to avoid double counting of securitized assets and securitization notes. CIUs are generally not consolidated except in cases of significant step-in risk. The EBA recommends a targeted review of the framework to address these issues, notably the interaction with the leverage ratio (p. 18-20).
- Exemption and sub-consolidation regimes: Article 19 of the CRR offers useful flexibility to exclude certain entities from the prudential perimeter, widely used. Article 22 on sub-consolidation poses practical and interpretative challenges, notably in multi-level structures and with third-country subsidiaries, leading to complexity and disproportionate costs. The EBA recommends regulatory clarifications, introduction of an exemption regime, and limiting sub-consolidation to holdings that must be consolidated (p. 13-14).
- Other application issues: The “subsidiary of subsidiary” principle ensures consolidation of indirectly held financial entities, even via insurance subsidiaries, ensuring associated risks are considered. The EBA confirms the current framework is sufficient for these cases and does not require additional regulatory changes (p. 20-21).
- Findings: The prudential consolidation framework is overall robust and appropriate, with a prudential perimeter generally aligned with the accounting perimeter, except notably for insurance entities excluded from the prudential perimeter. Definitions revised by CRR3 improved coherence and risk coverage. The sample of 70 institutions allowed identification of actual practices and gaps.
- Assumptions: The observed alignment between accounting and prudential perimeters partly results from a voluntary trend by some institutions to harmonize perimeters to simplify processes, although this is not compliant with current rules. The EBA assumes this alignment could be extended under conditions.
- Interpretations: The absence of an explicit definition of “undertaking” leads to interpretation divergences, potentially excluding controlled entities from the prudential perimeter, which harms consolidated supervision. The notion of control, although improved, requires clarifications to integrate effective control restrictions. Exemption and sub-consolidation regimes, although flexible, generate operational complexities and application divergences.
- Uncertainties: The potential impact of broader alignment between accounting and prudential perimeters on supervision quality and uncovered risks remains to be assessed. The exact scope of entities to include in the definition of “undertaking” and practical consolidation modalities for entities not subject to accounting obligations are also uncertain. Finally, management of specialized vehicles within the prudential framework, notably regarding the leverage ratio, requires in-depth analysis.
The EBA concludes that the European prudential consolidation framework is overall solid and adapted to current consolidated supervision needs, notably thanks to recent CRR3 amendments. However, targeted improvements are necessary to strengthen clarity, coherence, and effectiveness of the framework, reduce interpretation divergences, and ease operational constraints. The main recommendations addressed to the European Commission are:
- Launch a targeted review to assess the possibility of more systematic alignment between accounting and prudential perimeters, considering costs, benefits, and supervision impacts (Recommendation 1).
- Restrict the application of the equity method to cases where no consolidated carrying amount exists, to reduce unnecessary burdens (Recommendation 2).
- Introduce a clear and operational definition of “undertaking” based on effective control, regardless of legal form or accounting obligations, to ensure complete consolidation (Recommendation 3).
- Clarify the notion of control by integrating consideration of long and severe restrictions limiting effective control (Recommendation 4).
- Broaden the scope of step-in risk to other relationships than subsidiaries and holdings (Recommendation 12).
- Explicitly include pension fund management companies in the definition of financial institution (Recommendation 6).
- Clarify the treatment of SSPEs within the leverage ratio framework (Recommendation 7).
- Specify and simplify the application of exemption and sub-consolidation regimes, notably by introducing an exemption regime for sub-consolidation and limiting its application to holdings that must be consolidated (Recommendations 8, 9, 10, 11).
The EBA stresses the need for harmonized implementation and ongoing monitoring to adapt the framework to business model evolutions, digitalization, and emerging risks. It stands ready to support the Commission in impact analyses and possible future legislative revisions (p. 9-21, 34-41).
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