CRD 6 has been published: New requirements for M&A transactions and other reorganisations in the banking sector

The newly published EU Capital Requirements Directive 6 (Directive (EU) 2024/1619 (‘CRD6’)), which amends CRD IV, introduces new regulatory requirements for mergers and acquisitions and reorganisations. Once these new rules are implemented, a broader range of transactions and other reorganisations in the banking sector will require an approval by the competent supervisory authority. 

In this post, we will break down key elements of these new rules, their background, and what they mean for credit institutions involved in M&A and corporate finance activities.

Current regulatory approval requirements for banking sector M&A

Under the current general EU-wide ownership control rules, anyone intending to acquire a ‘qualifying holding’ (that is, a direct or indirect holding representing 10% or more of the capital or voting rights, or any holding that allows significant influence over management) in a credit institution, or further increase such qualifying holding, must notify the competent supervisory authority in advance. The acquisition can only be completed once the authority has approved it (or the applicable assessment period has expired without the authority objecting the transaction).

Moreover, M&A transactions in the banking sector are subject to general merger control and foreign direct investment (FDI) regulatory framework as well as the new EU Foreign Subsidies Regulation (FSR) addressing distortions caused by foreign subsidies. Depending on the turnover and ownership structures of and the foreign subsidies received by the parties involved in the transaction, this may involve a regulatory notification or clearance obligation.

Additionally, EU Member States may have national rules applicable to certain types of transactions in the financial sector. For example, in Finland, mergers, demergers and business transfers involving a credit institution established in the form of a limited liability company are governed by the Finnish Act on Commercial Banks and Other Credit Institutions in the Form of a Limited Company (2001/1501, the ‘Act on Commercial Banks’). These processes are based on the general Finnish merger and demerger rules applicable under the Finnish Limited Liability Companies Act (2006/624, the ‘Companies Act’), however, with the addition that such processes take into account the special characteristics of the credit institution, such as regulated capital structure and depositors as a specific type of creditors. The processes also engage the Finnish Financial Supervisory Authority (‘FIN-FSA’), which can oppose the transactions that may endanger a credit institution’s ability to meet regulatory requirements.

Expansion of supervisory powers under CRD 6

EU legislators seek to expand the supervisory and control powers of the EU financial supervisory authorities, enabling intervention in transactions that may raise prudential or money laundering concerns.

CRD6 extends these powers to cover transactions such as acquisitions of material holdings in financial or non-financial sector entities, material transfers of assets and liabilities, and mergers and divisions. Going forward, these transactions must be pre-notified to and pre-cleared by the competent supervisory authority before completion.

The aim is to allow authorities to perform prudential assessments and, if necessary, oppose transactions that could harm prudential profiles of the supervised entities.

Transactions subject to the new pre-notification rules

The following transactions of credit institutions and certain other entities subject to the new rules will require a notification to the competent financial supervisory authorities before completion:

  • Acquisition or divesture of a material holding: Applies to both regulated and non-regulated holdings (i.e. holdings in non-financial sector entities) exceeding 15% of the eligible capital of the entity intending to carry out such acquisition or disposal.
  • Material transfers of assets and liabilities: Transfers representing at least 1o% (or 15% for intragroup transactions) of the entity’s total assets or liabilities. Certain asset transfers are excluded from the scope of the concept of material transfers, including non-performing assets, cover pool assets within the meaning of the EU Covered Bond Directive (2019/2162) and assets to be securitised. Furthermore, assets or liabilities transferred in the context of the use of resolution tools, powers and mechanisms under the EU Bank Recovery and Resolution Directive (2014/59) (‘BRRD’) are excluded.
  • Mergers and divisions: A ‘merger’ or ‘division’ as further defined in CRD6, excluding those resulting from the application of the BRRD.

Authority approval process

The authority approval process set out in CRD6 only applies to acquisitions of material holdings and mergers and divisions, meaning that disposals of material holdings and material transfers of assets and liabilities would only be subject to the notification obligation referred to above.

Furthermore, the following types of acquisitions of material holdings and mergers and divisions are exempted from the scope of the approval process:

  • Intra-group acquisitions of a material holding under 0% risk-weighting regime in accordance with Article 113(6) of Regulation 575/2013 (‘CRR’)
  • Acquisitions of material holdings between entities within the same institutional protection scheme (provided that such scheme fulfils the requirements set out in Article 113(7) of the CRR);
  • Mergers or divisions requiring a new authorisation under the CRD regime (such as a new credit institution license)
  • Intra-group mergers

Assessment period and approval mechanism

The applicable assessment period and the approval mechanism varies depending on the transaction type:

  • Acquisitions of material holdings: The regular assessment period will be 60 working days, with a possible 20-30 workday suspension in case additional information is required for completing the assessment. Acquisitions may be completed based on a prior approval by the competent supervisory authority or pursuant to the authority not objecting the transaction prior to the expiry of the assessment period (i.e. based on a ‘tacit approval’).
  • Mergers and divisions: Require explicit prior approval (referred to in CRD6 as ‘positive opinion’) of the authorities, except for intra-group transactions, which may use the above-described tacit approval process or be exempt.

Authorities’ assessment criteria

The scope of the matters to be investigated by the authorities in connection with a contemplated transaction depends on the transaction type. The main focus is on whether the credit institution(s) undertaking the transactions (or, where applicable, the resulting new entity) would be able to comply and continue to comply with the prudential requirements laid down in the CRD/CRR regime and with other relevant EU law.

For mergers and divisions, considerations include, inter alia, the reputation and financial soundness (in particular in relation to the type of business pursued and envisaged for the entity resulting from the proposed transaction) of the entities involved in the proposed transaction, whether the implementation plan of the transaction is realistic and sound from a prudential perspective (which plan shall also be subject to monitoring by the competent supervisory authority until the completion of the proposed transaction), and whether there are any concerns from the perspective applicable anti-money laundering legislation.

Impact on Finnish credit institutions

As noted above, in Finland, mergers, demergers and business transfers involving a credit institution follow specific legal processes regulated by the Act on Commercial Banks, in which the FIN-FSA is vested with powers to intervene in transactions that could harm the prudential profiles of the supervised entities. While CRD6 introduces broader and more detailed EU processes, the underlying concept is similar to the existing regime.

However, CRD6’s broader scope and the more detailed (directly applicable) EU regulatory technical standards which will supplement CRD6 may add complexity and increase transaction costs, particularly in cross-border contexts. Such standards will not necessarily be aligned with the company laws of any individual Member State, as opposed to, for example, the Act on Commercial Banks, which is aligned with the merger and demerger processes set out in the Companies Act.

Certain ambiguities in CRD6, such as the scope of ‘material transfer of assets or liabilities’, need clarification to avoid complicating banks’ routine business activities. Under the current Act on Commercial Banks, a transaction only qualifies as a regulated business transfer if the transaction includes both assets and liabilities. In the ordinary course of their business activities, credit institutions execute, for example, various funding transactions which may be significantly more cumbersome to execute if they are made subject to a complex authority approval process. EU member states should pay special attention to clarifying the ambiguities in connection with implementation of CRD6 into the national laws to prevent undue complications.

Implementation timeline

CRD6 was published in the Official Journal on 19 June 2024 and will enter into force 20 days following the publication. Member States must adopt and publish provisions transposing CRD6 into national legislation by 10 January 2026, to be applied from the following day.

Considerations for credit institutions

While it will still take some time before the new rules set out in CRD6 are implemented into the Finnish law, Finnish banks planning M&A or corporate transaction activities in the near future should be aware of the new rules and their potential implication on the transaction process and closing conditions. This applies in particular to transactions where the closing may take place after the new rules have taken effect. It is advisable to ensure that the closing conditions of the transaction agreement account for the new processes and allow sufficient time for their completion.

Once CRD6 has been implemented, a broader range of transactions will require regulatory approval, necessitating more extensive internal processes to comply with notification and clearance requirements and to avoid inadvertent triggering of clearance requirements.