The EBA's January 2026 Report on consolidation comes at a particularly important stage in the evolution of bank balance sheet management. Banks increasingly rely on sophisticated risk-transfer and funding structures, yet the prudential framework must remain capable of calibrating capital requirements in a way that is both effective and proportionate: robust enough to capture residual or re-emerging risk, but not so blunt as to produce economically unjustified double counting where no additional credit risk has been created.
Against that background, banking groups operate under two mandatory but conceptually distinct consolidation regimes: the IFRS accounting framework and the CRR prudential consolidation framework. Although these regimes serve different regulatory functions, the EBA observes that they may produce divergent outcomes when applied to the same legal and economic structures. In some cases, that divergence is expected and academically defensible. In others, however, it may generate unnecessary uncertainty, inconsistent supervisory outcomes, or incentives for over-compliance by banks.
This article considers the EBA January 2026 Report as a timely intervention in what is often an uncertain interface between accounting and prudential consolidation, and examines how the EBA's analysis may contribute to a more coherent and predictable framework for group perimeter, exposure recognition and capital treatment, particularly in the context of securitisation special purpose vehicles.
Background
The prudential consolidation framework is a key pillar of the EU banking regulatory regime. It determines which entities and risks sit inside the scope of consolidated supervision for the purposes of applying CRR prudential requirements at group level.
In recent years, the European Banking Authority (EBA) has actively monitored the implementation of consolidation provisions, including the publication of the final draft regulatory technical standards on the methods of prudential consolidation under Article 18 of the CRR published in 15 April 2021 (the Prudential Consolidation RTS). On 9 January 2026, the EBA published the report on the completeness and appropriateness of the definitions and provisions on consolidation under Article 18(10) of the CRR (the EBA Report). The EBA Report included a detailed data collection exercise involving 70 institutions from 26 EU member states, including global systemically important institutions and non-systemic banking groups.
This article assesses the EBA's overall assessment and key recommendations relating to the scope of consolidation, securitisation special purpose entities (SSPEs), and the tests for control and financial institutions.
Accounting v prudential consolidation – why the difference?
Prudentially regulated institutions are subject to two parallel consolidation regimes: accounting consolidation under the applicable financial reporting framework and prudential consolidation under the CRR. Accounting consolidation is concerned with presenting a faithful representation of the reporting group's financial position, principally through control-based entity consolidation (IFRS 10) and the recognition/derecognition treatment of financial assets (IFRS 9). Prudential consolidation serves a different objective: it determines the perimeter within which capital, leverage and other CRR requirements apply, while mitigating double gearing and limiting opportunities for regulatory arbitrage through the migration of capital-intensive exposure to entities outside the prudential group.
Under the CRR, institutions, financial holding companies and mixed financial holding companies are subject to prudential requirements on both an individual and a consolidated basis. The prudential perimeter is defined by CRR concepts and is not coextensive with the accounting group. Generally, it captures subsidiary institutions and financial institutions, and is therefore activity-based rather than purely control-based. Accordingly, a subsidiary may be consolidated for accounting purposes yet fall outside prudential consolidation where it does not meet the relevant CRR criteria (for example, where the activities such subsidiary undertakes do not fall within the prudentially sensitive categories).
Key areas of concern in the EBA Report
There are a number of areas which accentuate some of the differences between accounting and regulatory consolidation treatment. We explore a number of these here:
Definition of "undertaking"
Although ubiquitously used throughout the CRR and Directive 2013/34/EU (the Accounting Directive), the term "undertaking" is defined in neither. The key interpretative guidance which assists here is the definition of "control", which includes the relationship between a parent undertaking and its subsidiary (as set out in the Accounting Directive) or any "similar relationship between any natural or legal person and an undertaking". The Accounting Directive permits Member States to require the disclosure of financial statements (and any consolidation) to be done in conformity with international accounting standards as set out in Regulation (EC) No 1606/2002 (the IAS Regulation), which requires EU firms whose securities are admitted to trading on an EU regulated market to report under the International Financial Reporting Standards (IFRS) (with the control test being dealt with under IFRS 10). Unfortunately, both under IFRS 10 and under the Accounting Directive, the consolidation requirements only apply to specific entities (exhaustively set out in Annexes I and II of the Accounting Directive). The EBA noted that some firms have adopted a narrow interpretation, arguing that the term "undertaking" would not apply to specific entities which were otherwise not captured under the Accounting Directive / IFRS 10, which includes certain entities without separate legal personality and can exclude certain partnerships and foundations which aren't expressly listed (such entities being the Excluded Entities).
Such a narrow interpretation could result in certain Excluded Entities not being consolidated from a prudential perspective. One could argue that they would likewise be excluded under the accounting consolidation requirements (given they are not required to be consolidated under IFRS 10). However, from an accounting perspective, even if the Excluded Entity itself is not consolidated, the assets and liabilities of such Excluded Entities may, on a look-through basis, be consolidated into the accounting group (for example, through IFRS 9, if the substantial risks and rewards of the assets have not, for example, left the group).
Although the EBA noted that the potential inconsistency was fairly limited, it recommended to the European Commission that a definition of "undertaking" be considered to avoid having the risk of such inconsistency. In particular, it recommended the existence of a parent-subsidiary relationship without any regard to the legal form of the undertaking or entity in question.
Definition of "financial institution"
Unlike the accounting regime the prudential consolidation addresses "financial institutions" only. The term "financial institution" under the CRR is intended to capture a broad range of undertakings engaged in financial or ancillary banking activities which may ultimately pose risks to the group. An inconsistent application could lead to an exclusion of undertakings bearing risks to the group, and the group therefore being prudentially unprepared if any such risks ultimately materialise. The current definition has two prongs:
- Personal Scope: the entity has to be an investment firm, a mixed financial holding company, an investment holding company, a payment service provider, an asset management company or an ancillary services undertaking. Insurance companies and SSPEs are expressly excluded from this list. Note that this list includes both regulated (i.e. investment firm) and unregulated (i.e. an ancillary services undertaking and/or certain asset management companies) entities; and
- Material Scope: such in-scope entity's "principal activity" should be one enumerated in the CRR and MiFID.
The EBA Report noted two specific issues with the classification:
- Principal Activities: the EBA noted that there was some inconsistency on how "principal activities" were applied, with some firms taking a form over substance approach and simply tagging the principal activities against the stated business purpose in the articles and/or the NACE code, which frequently would not go into the level of detail required to trigger the activities set out in the CRR. For this, the EBA proposed that a more objective test should be used by firms, including using quantitative indicators such as share of total assets, revenues or employees attributable to the various activities. This way, firms which may not have been set up as financial counterparties but which have subsequently started providing more financial services would be in scope. In particular, the EBA recommended that in each of the above tests, provided that more than 50% of the indicators are associated with the relevant financial activities, the principal activity test would be passed and the relevant entity would be considered a financial institution.
- Regulated v Unregulated: the CRR personal scope expressly includes both regulated and unregulated entities, and this was intentional to ensure that any unregulated entity doing banking-style or financial activities could potentially be caught. Notwithstanding this, however, the EBA noted that certain firms adopted a wider interpretation for unregulated entities, and therefore recommended that the European Commission consider tightening the scope of the definition.
The exclusion of SSPEs from the definition of "financial institution" is intentional. It is likely that most (if not all) SSPEs will be seen to have a principal activity (issuing of securities, acquisition of financial instruments, or financial or credit intermediation) which falls within the scope of consolidation as it satisfies the material scope above. In practice, this would mean that all SSPEs would need to be prudentially consolidated. Clearly, this could undermine the use of securitisations in the capital relief space. So although SSPEs would not be consolidated under the "financial institution" definition (and therefore generally not subject to prudential consolidation), they may still fall within the prudential scope through, for example, a perceived step-in risk (i.e. where a regulator forms the view that there is a substantial risk that an institution decides to provide non-contractual financial support to an undertaking in stressed conditions). In fact, the frequent assistance by originators post financial crisis to support their securitisation SSPEs was one of the key reasons for including the prohibition against implicit support as a mandatory Level 1 requirement for all SRT transactions.
SSPEs
The treatment of SSPEs, from both accounting and prudential perspectives, remains a focal point of debate given the role securitisation has taken in the banks balance and capital management toolkit. While securitisations have long been used for funding and liquidity purposes, they are increasingly deployed in significant risk transfer transactions to transfer credit risk to third-party investors. The SSPEs themselves provide the legal and operational structure through which exposures are isolated from the balance sheet of the originator and their (credit) risk transferred to investors.
The EBA distinguishes between two broad categories:
- Funding-driven Securitisations: these are securitisations where the primary purpose is to convert illiquid underlying exposures into securities which can either be used for liquidity purposes by the bank itself (for example, as high quality liquid assets or central bank eligible collateral deposit schemes) or for the purposes of obtaining funding from the debt capital markets (by the sale of such securities to third party investors). In such structures, the originating bank would normally consolidate the SSPE on its accounting balance sheet (given it is likely to have "control" over such SSPE under IFRS 10) and continue to calculate risk-weighted exposure amounts for the underlying exposures.
- Capital Relief Securitisations: these are securitisations where the main purpose is for the bank to decrease its total risk-weighted exposure amounts and/or its leverage ratio by transferring the credit risk to third parties. In such scenarios, it is possible that the accounting and prudential consolidation treatment may not align – for example, an originator may achieve significant risk transfer on a traditional cash securitisation but may not necessarily achieve accounting derecognition. In such a scenario, both the underlying exposures and the SSPE issuing the securities would remain on the accounting balance sheet of the originator, although the originator would no longer (from a prudential perspective) be required to calculate risk-weighted exposure amounts in respect of the underlying exposures.
Two distinct questions arise in this context, and they are frequently conflated. The first is whether the SSPE falls within the originator's accounting and/or prudential consolidation perimeter. The second, and more significant for capital purposes, is whether the originator must continue to hold regulatory capital against the underlying exposures after their transfer to an SSPE, irrespective of the SSPE's prudential consolidation status and irrespective of the fact that those underlying exposures may have been legally transferred to a (non-prudentially consolidated) SSPE.
The EBA observed relatively consistent market practice in capital relief securitisations, where SSPEs are generally not prudentially consolidated even if they remain within the accounting perimeter. By contrast, practice was less consistent in funding-driven securitisations. In those transactions, SSPEs are often consolidated for accounting purposes but, given their exclusion from the CRR definition of "financial institution", there is generally no corresponding requirement for prudential consolidation. The EBA nevertheless found that some originators prudentially consolidated such SSPEs by way of over-compliance with the CRR, apparently as a conservative response to perceived double-counting risks where the originator recognises both the underlying exposures (absent SRT and/or derecognition) and retained securitisation positions. The consequence is a potentially distortive increase in leverage exposure and risk-weighted exposure amounts without any commensurate increase in underlying credit risk.
The EBA's position is that firms should not extend prudential consolidation beyond the CRR perimeter merely to manage these effects. Instead, it has invited the European Commission to consider whether the CRR framework should be adjusted to address possible double counting (including for leverage ratio purposes) where an SSPE is consolidated for accounting purposes but excluded from prudential consolidation.
Why is the distinction between accounting v Prudential relevant?
Treatment of "intra-group" exposures and credit risk mitigation
In practice, perimeter alignment between accounting and prudential consolidation generally reduces implementation complexity for firms, although important exceptions remain. By contrast, divergence between the two regimes creates operational and valuation challenges. Where an entity is included in the accounting group but excluded from the prudential perimeter, its financials must be removed for prudential reporting purposes, with consequential adjustments to intercompany positions involving entities that remain prudentially consolidated. Conversely, where an entity falls within the prudential perimeter but is not consolidated for accounting purposes, firms may lack a ready IFRS consolidation basis and may need to artificially construct exposure values using IFRS-consistent measurements on a synthetic basis for prudential reporting.
Following consolidation, intra-group assets, liabilities and transactions are eliminated, including intra-group guarantees and other forms of credit protection. As a result, eligible credit risk mitigation that may be effective at solo level (for example, a financial guarantee from a credit-rated corporate parent) will not necessarily be recognised at consolidated level. This is a key prudential concern, as intra-group credit protection or eligible credit risk mitigation techniques should not have the effect of reducing the consolidated groups' overall capital position. Prudential consolidation is therefore not merely a question of group perimeter, but of risk attribution. Once the group is treated as a single prudential unit, intra-group arrangements cannot be relied upon to manufacture capital relief at consolidated level. The practical significance of perimeter classification therefore lies not only in who is consolidated, but in which risk mitigants survive consolidation and remain capable of affecting the group's capital and leverage metrics.
Effect of consolidation on regulatory capital
Institutions under the CRR are required, among other things, to maintain a minimum capital ratio (MCR) of 8% and a leverage ratio of 3%. These are calculated as set out below:
Where:
"T1" is the total Tier 1 capital held by the institution (being the sum of Common Equity Tier 1 and Additional Tier 1 capital).
"T2" is the total Tier 2 capital held by the institution.
"T1 + T2" being the minimum capital required by the institution to maintain the 8% MCR (also called own funds).
"TREA" being the total risk-weighted exposure amount of the institution (being the total exposures multiplied by the relevant risk-weighting for each exposure).
Where:
"TEM" is the sum of all exposures of the bank (i.e. the total exposure measure).
In summary, while the MCR is calculated by reference to risk-weighted exposure amounts and the leverage ratio by reference to non-risk based exposure measures, both metrics are ultimately driven by the institution's aggregate exposure basis. An increase in such exposures would therefore result in an increase in both capital and leverage outcomes (albeit through different denominator methodologies).
Under the CRR, these ratios are calculated by reference to the prudentially consolidated group rather than the accounting group. In Table 1 below, Parent A must include the exposures of Subsidiary A (which falls within the prudential perimeter) and eliminate intra-group exposures between them for consolidated prudential reporting. By contrast, Subsidiary B, although consolidated for accounting purposes, is excluded from the prudential perimeter; its exposures are therefore not consolidated into the group's prudential metrics, and exposures between Parent A and Subsidiary B must be treated on a third-party basis.
Importantly, while prudential consolidation determines the perimeter within which exposures are assessed, the accounting treatment of particular assets and liabilities may still influence the exposure values recognised for prudential purposes. Prudential consolidation and accounting recognition therefore perform different functions, but they interact directly in the measurement of regulatory capital.
The securitisation example in Table 2 illustrates this distinction. The relevant question is not only whether an orphan SSPE is consolidated for accounting or prudential purposes, but also in which circumstances the originator must continue to calculate regulatory capital against the underlying exposures after they have been transferred (legally) to the SSPE.
As noted above, the accounting and prudential consolidation status of the SSPE does not, in itself, resolve the capital treatment of the underlying exposures. Even where a true sale is effective as a matter of law, a failure to satisfy the IFRS 9 derecognition test will generally result in the assets remaining recognised on the originator's balance sheet for accounting purposes. In such circumstances, the originator will ordinarily continue to hold regulatory capital against those exposures, except in circumstances where it is able to achieve a significant transfer of risk under the CRR. The key point is that this outcome is better understood as a consequence of the originator's continuing economic exposure to the underlying risk, rather than as a direct function of whether the SSPE is consolidated for accounting or prudential purposes.
It is also worth highlighting scenario 4 above. The general position under the CRR is that own-fund requirements are premised on the "exposure value" of the relevant exposures in question. Unless the CRR states otherwise, the exposure value of an asset will be its accounting value (measured without credit risk adjustments). If the Originator has been successful in achieving IFRS 9 derecognition of the underlying exposures then, just as if the Originator had done a portfolio sale to a third party, those underlying exposures will no longer have any accounting value on the Originator's balance sheet. That is, from an accounting perspective, their exposure value is zero because the Originator is no longer exposed to any credit losses.
Concerns around shadow banking
Regulators in the EU, the UK and even the Basel Committee (on a global stage) have increasingly shown interest in the shadow banking industry, where a system of credit intermediation and bank-like services are provided involving entities and activities outside the regular banking system and, crucially, outside the scope of prudential and banking regulatory regimes. There are a large number of private non-regulated entities which are active in the shadow banking space. However, regulators are particularly concerned about banks being involved in shadow banking transactions where risks end up not being consolidated on a bank's prudential balance sheet but may remain, in economic terms, an ongoing risk for the bank.
Although SSPEs within the context of a securitisation are broadly subject to a number of legal and regulatory controls, special purpose vehicles more generally sit at the heart of shadow-banking concerns because they can fall outside the prudential consolidation perimeter even where the bank has accounting control (or continuing involvement), creating scope for perimeter arbitrage.
Next steps and round up
From a policy perspective, the real fault line is not necessarily between the distinction between accounting and prudential in the abstract (although the gaps between the two are regularly considered by the EBA). The two frameworks serve different purposes and should continue to diverge where necessary. The more urgent objective is predictability: firms need a clearer, repeatable framework for moving from an IFRS outcome (IFRS 9 derecognition and IFRS 10 control) to the CRR outcome (prudential perimeter, exposure value, and capital treatment) without relying on conservative over-compliance or informal supervisory assumptions. The EBA Report has considered where some of these overlaps may need to be tweaked and/or reforms implemented.
The issue is particularly acute for securitisations, which frequently employ orphan SSPEs and are increasingly being used for capital relief purposes. The EBA Report recognises that the current framework can generate the wrong incentives: institutions may prudentially consolidate where CRR does not require it, simply to avoid perceived double counting, while others may rely too heavily on accounting presentation to infer prudential consequences.
The next steps will need to take into account the EBA Report's study of the practical ramifications of how banks treat such exposures. The European Commission (together with the EBA) will need to consider whether distinctions are justified in the prudential perimeter, whether recognition and derecognition under IFRS 9 and consolidation under IFRS 10 should have an impact on the prudential consolidation and what the extent of the overlap is between securitisations achieving significant risk transfer and full accounting derecognition securitisations. Although there is detailed legislative guidance and provisions relating to SRT, even in the contemplated reform of the EU securitisation framework the express mention of accounting derecognition and the impact on the prudential balance sheet is less pronounced.
It is clear that the EBA's view is that a substance over form approach should be adopted, and not one based on technical interpretation. Institutions may therefore ensure that they can produce internal consolidation and capital maps showing the relevant undertaking vehicle, the accounting and prudential treatment, and the justification for including or excluding a particular exposure from its total exposure amounts.
In that sense, the EBA Report is less a narrow consolidation exercise and more an early warning: as banks use increasingly sophisticated risk-transfer and funding structures, the credibility of consolidated supervision will depend on whether the system can explain, in a disciplined way, which risks moved, which risks remained, and where capital is meant to absorb the latter.
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