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ESBG Summary of Comments on CEBS Consultation Paper (CP 33)

Core Content of the Document

The European Savings Banks Group (ESBG) has provided detailed comments on the CEBS Consultation Paper (CP 33) regarding the implementation guidelines for capital instruments under Article 57(a) of Directive 2006/48/EC recast. ESBG generally supports the principles-based approach but raises several concerns about the scope and implications of the proposed guidelines.

Main Concerns and Views

1. Risk of Anticipating Basel and Commission Developments

• ESBG emphasizes the importance of not anticipating or constraining future regulatory developments at the Basel Committee and the European Commission.
• The current CEBS guidelines may exceed the mandate by making assumptions that could conflict with future rules.
• ESBG urges CEBS to base its guidance solely on the framework established by CRD 2.

2. Inappropriateness of Using Ordinary Shares as Benchmark

• ESBG argues that designating ordinary shares as the benchmark is unbalanced and not suitable for all types of financial institutions.
• It highlights the diversity of corporate structures, particularly in cooperatives and mutuals, and the need for flexibility in capital instruments.
• ESBG recommends removing all references to ordinary shares as a benchmark and allowing for specific rules for non-joint stock companies.

3. Missing Reference to Transitional Arrangements

• ESBG points out that the CEBS guidelines lack any mention of transitional arrangements, which are crucial for determining Core Tier 1 capital.
• The absence of such arrangements may lead to uncertainties and market distortions, especially given the conflicting cut-off dates proposed by CRD 2 and Basel Committee.

4. Principles-Based Approach

• ESBG supports the principles-based approach in defining own funds.
• It stresses that explanations of criteria should not go beyond the wording of the regulations and should not add new substantive content.

5. Remarks on Individual Criteria

A. Definition of Capital

• ESBG supports a common definition based on Article 57(a) of the CRD and not on recital 4.
• It opposes the use of "legal owner" in the first criterion, as it may be too restrictive.

B. Different Classes of Shares

• ESBG supports the existence of different share classes and argues against overvaluing voting rights.
• It recommends deleting paragraph 38 of the CEBS guidelines.

C. Deduction from Own Funds

• ESBG believes that the deduction of capital instruments from own funds should occur only when the capital actually flows out of the bank.
• It suggests that the current provision in paragraph 48 is inappropriate and should be removed.

D. Re-Accessing the Market

• ESBG raises concerns about the feasibility of requiring institutions to demonstrate their ability to re-access the market.
• It recommends either deleting this requirement or providing clear examples of how it can be fulfilled.

E. Specific Situation of Non-Joint Stock Companies

• ESBG highlights that the permanence criteria may not be applicable to non-joint stock companies with variable capital.
• It suggests that the guidelines should be adjusted to account for such structures and include safeguards that ensure core capital remains available.

F. Flexibility of Payments

• ESBG questions the requirement that distribution levels should not be tied to the amount paid in at issuance.
• It argues that this would exclude fixed coupon instruments from Core Tier 1, which is not in line with the inclusive wording of the CRD.

G. Loss Absorbency

• ESBG criticizes the CEBS interpretation of loss absorbency, particularly in going concern and liquidation scenarios.
• It suggests that the distinction should be between equity holders collectively and other claim holders, rather than between different classes of equity.
• ESBG proposes a revised wording for criterion 9 that emphasizes collective subordination and proportional claims.

Key Recommendations

• Delete references to ordinary shares as a benchmark.
• Remove transitional arrangements from the guidelines.
• Avoid overvaluing voting rights.
• Base the definition of capital solely on Article 57(a).
• Reconsider the deduction of capital instruments from own funds.
• Adjust the permanence criteria to account for non-joint stock companies.
• Clarify the requirement for demonstrating market re-access.
• Ensure flexibility in payment structures.
• Revise loss absorbency criteria to reflect collective subordination.

Conclusion

ESBG believes that the CEBS guidelines should be aligned with the existing framework of the CRD and should not anticipate future regulatory developments. It emphasizes the need for flexibility and legal certainty, particularly for non-joint stock companies and for instruments with fixed returns. ESBG calls for revisions to ensure that the guidelines do not restrict the diversity of capital instruments and that they reflect the principles-based approach intended by EU regulators.