EBA欧洲银行-CP17_EBFcomments_16页_218kb

EBF Comments on the CEBS Draft Proposal for a Common EU Definition of Tier I Hybrids

I. General Outlook

The EBF welcomes the CEBS draft proposal as a starting point for examining hybrid instruments as eligible capital in Europe. However, it identifies several significant weaknesses that need to be addressed before the proposal is implemented into EU legislation. These weaknesses could lead to deterioration in standards, practices, and the quality of capital.

Key Points:

• The document lacks clarity on the underlying motives of its proposals.
• CEBS has not fully embraced the industry's consensus on the interrelation of loss absorption, permanence, and flexibility of payments.
• The proposal may be premature, as the Basel Committee is still in the process of finalizing its definition of eligible capital.
• The CEBS approach is overly prescriptive and could create competitive distortions within the EU.

The EBF suggests a staged approach:

• EU banks should be authorized to issue hybrids to strengthen their capital base.
• A harmonized 50% limit on hybrid inclusion in Tier 1 capital should be imposed, as it aligns with the Sydney Press Release and the practices of major EU Member States.
• Member States should not be allowed to impose additional or stricter requirements, to avoid an unlevel playing field.
• A common knowledge centre at EU level should be established to better understand hybrid instruments and their market usage.

II. General Observations

1. The Document's Major Weakness: Lack of General Principles

• CEBS fails to provide a clear, unified rationale for its proposals, leading to potential misinterpretation across EU Member States.
• The "substance-over-form" principle is not properly analyzed, despite being a widely accepted guiding principle in discussions on hybrid instruments.
• The CEBS proposal assumes a generic definition of "loss," which is problematic. It does not clarify whether it refers to operating losses, balance sheet losses, or other types of losses.
• The document does not adequately address the legal and tax environments in which hybrids are issued, which vary significantly across Member States.

2. Deficiencies in the Proposals

• The CEBS proposals are more restrictive than the Sydney Press Release, which could disadvantage EU banks in both regulatory and market contexts.
• The proposals are rules-based and overly detailed, limiting flexibility and innovation.
• The EBF advocates for a qualitative and non-prescriptive approach, which would allow for better alignment with market practices and regulatory convergence across sectors.

III. Guiding Principles

1. Loss Absorption

• CEBS has not clearly defined the concept of "loss absorption," which is central to the eligibility of hybrid instruments.
• The EBF proposes that an instrument must meet the following conditions to qualify as loss-absorbing:
  • It must help satisfy the claims of all non-subordinated creditors in the event of insolvency.
  • It must support the bank’s ability to continue operations as a going concern, without hindering recapitalization.
• The EBF argues that the proposed write-down or conversion mechanisms are not only unnecessary but also less effective than customary market practices in times of distress.
• These mechanisms could also be available only in a limited number of Member States, further complicating harmonization.

2. Flexibility of Payments

• Regulators should not overly restrict the flexibility of hybrid instruments, as their purpose is to provide financial flexibility to the issuer.
• Hybrid instruments should be allowed to suspend payments during financial distress, without triggering default.
• The EBF questions the CEBS proposal that requires waiving payments when capital requirements are breached, arguing that such rules may be unnecessary and counterproductive.
• The dividend stopper and pusher mechanisms are seen as important tools for ensuring payment discipline, but the EBF believes they should be structured in a way that allows for flexibility and transparency.

IV. CEBS Proposals on Limits

a) Overall Limit

• The CEBS proposal introduces a link between the inclusion of hybrids in Tier 1 capital and the bank’s Tier 1 ratio, which could create a "cliff effect" where a portion of existing hybrids may no longer qualify as capital once the ratio drops below a threshold.
• This could accelerate crises and complicate capital planning for banks.
• The EBF argues that such a limit would disadvantage well-capitalized banks and is not aligned with the SPR’s principles.

b) 15% Limit

• The SPR allowed a 15% limit on the issuance of innovative hybrid instruments at the time of issuance.
• CEBS, however, applies this limit continuously, not just at issuance, which is more restrictive and could lead to operational challenges.
• The EBF emphasizes that the "at issuance" principle should be retained to avoid unintended consequences from market fluctuations, such as foreign exchange movements.

V. Conclusion

The EBF believes that the CEBS proposal, while a step forward, is premature and overly detailed, and that it fails to incorporate key principles such as loss absorption, substance-over-form, and market flexibility. A more qualitative and flexible approach is needed to align with the Sydney Press Release and to ensure a common, clear, and stable vision of hybrid instruments as Tier 1 capital across the EU.