Luxembourg law of 20 May 2021 enters into force amending Luxembourg laws in the financial sector

On 21 May 2021, the Law of 20 May 2021 (Law)¹ was published on Mémorial A amending, among others, the law of 5 April 1993 on the financial sector, as amended (LFS).

The Luxembourg laws which are amended by the Law relate to all the basic obligations of entities (particularly credit institutions) supervised by the Luxembourg Supervision Commission of the Financial Sector (Commission de Surveillance du Secteur Financier) (CSSF) and, to a lesser extent, the Luxembourg insurance sector supervisory authority (Commissariat au Assurances) (CAA). Particular attention needs to be paid to several amendments made to the LFS, as explained below.

History of the Law

In May 2019, the “Banking Package” was adopted by voting for the CRD V,² the BRRD II,³ the CRR II⁴ and the SRMR II.⁵ These new EU legislative texts amended the CRD,⁶ the CRR,⁷ the BRRD⁸ and the SRMR,⁹ respectively. The amendments to CRD, the BRRD and the SRMR should have been implemented by the Member States of the EU and should have been applicable as of the 28 December 2020 (as applicable) while the amendments to CRR shall apply as of 28 June 2021.

The overall objective of these reforms is to further reduce risks in the banking sector. A series of changes are intended to implement reforms agreed at international level by the Basel Committee and the Financial Stability Board.

Most of the new prudential rules applicable to credit institutions are found in the directly applicable regulations, of which only a few isolated provisions needed to be and are operationalized by the Law.

They include, in particular, the provisions relating to the introduction of a binding leverage ratio and a net stable funding ratio (NSFR), as well as the definition of the new definition of the “Total Loss Absorption Capacity” (TLAC) standard applicable to Globally systemically important institutions (G-SIBs) only. Risk-sensitive capital requirements are also strengthened for credit institutions that are very active in securities and derivatives trading. G-SIBs are subject to enhanced loss-absorbing capacity and recapitalization requirements in the event of resolution.

The main changes in the regulatory framework are described below, along with a particular focus on the changes brought to in the LFS.

Extent of changes

Below we will outline the main changes made by the Law outlining the relevant new Articles of the relevant law.

New minimum capital requirements

CRR II adds a leverage ratio of 3% to the capital requirements applicable to all institutions subject to CRD. For G-SIBs, the leverage ratio must be increased by 50% of the cushion rate of the G-SIBs concerned. The leverage ratio is equal to the amount of the institution's Tier 1 capital (CET1 and AT1) divided by the amount of its total unweighted assets (including off-balance sheet assets and derivatives). It is calculated as equal to the institution's measure of capital divided by the institution's measure of total exposure.

Such amendments have been included in the 2015 Law with the newly created Articles 46-1 to 46-15 of the 2015 Law replacing the current Article 46 thereof.

TLAC standard

The CRR incorporates a harmonized minimum level of TLAC for G-SIIs. The specific requirements per institution are integrated in the BRRD, in line with the regulatory framework set by CRD V and CRR II.

The new regulatory framework of CRR II incorporates the TLAC standard by introducing a new capital requirement and eligible liabilities as stated in the new Articles 46 to 46-15 of the 2015 Law.

Revision of risk weighting and large exposure standards

The amendments to CRR mainly aim at making the requirements proportionate. Thus, CRR II allows institutions with a small trading book (less than or equal to EUR100 million and 5% of their total assets) to apply the treatment of credit institution book positions to their trading book. Institutions with a medium-sized trading book (less than or equal to EUR300 million and 10% of their total assets) may use the simplified standard approach, which is equivalent to the current standard method.

Such amendments are now implemented in Article 46-3 of the LFS.

Group supervision

CRD V introduces a series of changes to the supervision on a consolidated basis with respect to financial holding or mixed holding companies. Prudential requirements may be imposed on financial holding companies and mixed financial holding companies and they can now be held directly responsible for the compliance with the consolidated prudential requirements, without imposing additional prudential requirements on them on an individual basis.

Such a change is one of the biggest changes induced by the Law in the LFS. As a matter of fact, two chapters will be added including the new Articles 34-1 to 34-6 of the LFS.

The inclusion of these holding companies in the scope of the supervisory powers of supervision does not restrict in any way the possibility for the CSSF to use the means of direct supervision over the CRR institutions of the group which would be in charge of ensuring compliance with the prudential requirements on a consolidated basis.

Article 34-2 of the LSF envisages the approval procedure of financial holding companies established in Luxembourg and thus determines the mission of the CSSF when it acts in its capacity as competent authority of the home Member State, while Article 34-3 of the LSF establishes the role of the CSSF when it acts in its capacity as supervisor on a consolidated basis for the purposes of the approval procedure. Indeed, the CSSF may be competent either under Article 34-2 of the LSF because the financial holding company is established in Luxembourg, or under Article 34-3 because it is the supervisor on a consolidated basis of a group which the financial holding company belongs to and that is established in a Member State other than Luxembourg.

The new Article 34-2(6) of the LFS clarifies the circumstances under which a financial holding company or a mixed financial holding company is eligible for an exemption from approval. Only financial holding companies that are not involved in making management, operational or financial decisions relating to the group or group subsidiaries that are CRR institutions or financial institutions may qualify for an exemption.

In case of an exemption, the CSSF, as supervisor on a consolidated basis, must ensure that the conditions are fulfilled at all times.

The new Article 34-4 of the LSF requires that third-country banking groups that control two or more institutions in the EU reaching together the threshold of assets equal to EUR40 billion or more, must establish a single intermediate parent undertaking in Luxembourg, unless such groups have established an intermediate parent undertaking (IPU) in another EU Member State. The purpose of this requirement to establish an IPU is to ensure the group has a single IPU in the EU, to facilitate the supervision of the group within the EU as well as to improve the resolvability of the companies concerned.

Systemic risk buffer rate

CRD V introduces the possibility for Member States to require from certain credit institutions a buffer for systemic risk, in addition of the already existing capital conservation buffer and a countercyclical capital buffer.

Article 59-10 of the LFS includes the method of calculation of the abovementioned buffer for systemic risk.

Resolution entities and resolution groups

BRRD II introduces the concept of “resolution entity” which means an entity in respect of which resolution measures may be applied. This concept is now defined under Luxembourg law in Article 1 44ter of the 2015 Law.

Power of resolution authorities (CSSF) to temporarily suspend contractual obligations

The power of resolution authorities to temporarily suspend certain contractual obligations of institutions and entities is adapted. Thus, a resolution authority will be able to exercise this power before an institution or entity is placed in resolution, if it is determined that the failure of the institution or entity is actual or foreseeable, if a private measure that, in the opinion of the resolution authority, would prevent the failure of the institution or entity within a reasonable time is not immediately available, and if the exercise of this power is deemed necessary to avoid a further deterioration of the financial conditions of the institution or entity. The duration of the suspension shall be limited to a maximum of two business days. The suspension may continue to apply after the adoption of the resolution decision until the expiration of this maximum duration.

The power of suspension may be applied to covered deposits, under certain conditions and are reflected in the new Articles 34-1 and 69-1 of the LFS.

Enhanced international cooperation

A new Article 44-2bis is included in the LFS and aims at allowing the CSSF to transmit, under certain conditions, information to the International Monetary Fund, the World Credit institution, the Credit institution for International Settlements and the Financial Stability Board and to assist these international bodies in the performance of their specific tasks, in particular as regards the development of standards.

In addition, Article 45 of the LFS is amended to strengthen cooperation between the competent authorities of the Member States with regard to the supervision of the activities of third country banking groups in the EU.

The amendments of the CSSF Law, the AML Law, the PSL and the Insurance Sector Law are minor and are only aimed at enhancing international cooperation.

Entry into force of the amendments

The above mentioned amendments entered into force on 25 May 2021 except for the inclusion of the new Articles 59-13ter and 59-13quater of the LFS and the amendment of Article 59-14, paragraph 1 of the LFS, which entered into force on 1 January 2022, as mentioned in Article 108 of the Law.

Caveat and coordinated versions of the amended laws

It should be noted that the current coordinated versions of the LFS, the CSSF Law, the AML Law, the PSL and the Insurance Sector Law do not yet contain the abovementioned amendments.

¹ 1. transposing:
a) Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures; and
b) Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC;
2. implementing Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012; and
3. amending:
a) the Law of 5 April 1993 on the financial sector, as amended;
b) the Law of 18 December 2015 on the failure of credit institutions and certain investment firms, as amended (2015 Law);
c) the Law of 24 March 1989 on the Banque et Caisse d’Epargne de l’Etat, Luxembourg, as amended;
d) the Law of 23 December 1998 establishing a financial sector supervisory commission (“Commission de surveillance du secteur financier”), as amended (CSSF Law);
e) the Law of 12 November 2004 on the fight against money laundering and terrorist financing, as amended (AML Law);
f) the Law of 10 November 2009 on payment services, on the activity of electronic money institution and settlement finality in payment and securities settlement systems, as amended (PSL); and
g) the Law of 7 December 2015 on the insurance sector, as amended (Insurance Sector Law).
² Directive (EU) 2019/878.
³ Directive 2019/879.
⁴ Regulation (EU) 2019/876.
⁵ Regulation 2019/877.
⁶ Directive 2013/36/EU
⁷ Regulation (EU) 575/2013.
⁸ Directive 2014/59/EU.
⁹ Regulation 806/2014