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EAPB Comments on the Draft Proposal for a Common EU Definition of Tier 1 Hybrids

Core Content

The European Association of Public Banks (EAPB) has provided detailed feedback on the CEBS draft proposal for a common EU definition of Tier 1 hybrid capital instruments. The EAPB supports the initiative to harmonise the diverging rules across the EU but cautions against introducing rules that go beyond the Basel Committee's "Sydney Press Release (SPR)" of 1998.

Main Issues and Comments

1. General Remarks

• Harmonisation Support: The EAPB welcomes the Commission's and CEBS' efforts to harmonise the eligibility of hybrid instruments as Tier 1 capital.
• Avoiding Additional Rules: They stress that no additional rules beyond the SPR should be introduced in EU legislation to avoid competitive disadvantages for EU banks.
• Level Playing Field: They advocate for transparency requirements, such as supervisory disclosure, to ensure a level playing field.

2. Detailed Comments

2.1. Permanence

• Maturity Interpretation: The EAPB argues that "permanent" does not necessarily mean undated, and that CEBS' interpretation goes beyond the SPR. Instruments with long maturities, such as those with a 30-year term, are acceptable in other non-EU jurisdictions.
• Lock-in Feature: They suggest that dated instruments with a "lock-in" feature could still be considered permanently available for regulatory purposes.
• Call Right Restrictions: The EAPB finds the proposed five or ten-year minimum periods for call rights too restrictive and believes the Basel Committee should address this issue.

2.2. Loss Absorption

• Central Criterion: The EAPB considers the loss absorption feature to be central to the eligibility of hybrid instruments.
• Redundancy of Write-down Mechanisms: They argue that the mandatory write-down mechanism and alternative mechanisms proposed by CEBS are unnecessary and do not provide tangible regulatory benefits.
• Definition of "Loss": They highlight the lack of clarity regarding the definition of "loss" — whether it refers to annual net loss, accumulated loss, or loss in individual or group accounts.

2.3. Flexibility of Payments

• SPR Compliance: The EAPB believes CEBS' requirement for the ability to waive payments at any time and for an unlimited period is more restrictive than the SPR.
• Crisis-Based Waiver: They argue that discretion to stop payments should only be available in crisis situations, as allowing it at earlier stages could make hybrid instruments more expensive and harder to market.
• Supervisory Discretion: The EAPB is concerned that leaving discretion to supervisory authorities on payment waiver could lead to divergent rules across Member States, undermining harmonisation.

2.4. Limits to Inclusion into Tier 1

• 50% Limit: The EAPB supports the SPR's 50% minimum requirement for traditional core capital and believes discussions on tighter limits should occur at the Basel level.
• 30–50% Continuum: They find the proposed continuum between 30% and 50% of Tier 1 capital for hybrids excessively complex and potentially harmful, especially in times of stress.
• 15% Limit for Innovative Instruments: The EAPB suggests that the 15% limit for innovative instruments is outdated and could reduce solvency capital during losses. They recommend revisiting this at the Basel level.

2.5. Grandfathering

• Support for Gradual Reduction: The EAPB supports the proposal for a grandfathering clause with a 30-year gradual reduction period.
• Need for Clarity: They request examples to clarify the continuous reduction table to avoid diverging interpretations.
• Equal Treatment of Hybrids: The EAPB suggests that all hybrid instruments should be treated equally, rather than receiving special treatment based on redemption incentives, to prevent market disruption.

Key Information

• The EAPB represents 28 public banks, funding agencies, and associations across Europe, covering approximately 15% of the European market share.
• The combined balance sheet total of these institutions is about EUR 3,500 billion, and they employ around 190,000 people.
• The EAPB urges CEBS to avoid overly detailed rules that could lead to divergent national implementations and to align with the SPR guidelines where possible.
• They advocate for a level playing field, transparency, and a more flexible approach to hybrid capital eligibility.