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ESBG Summary of Comments on CEBS Consultation Paper on Hybrid Capital Instruments (CP 27)

Core Content

The European Savings Banks Group (ESBG) has provided detailed comments on the CEBS Consultation Paper on Implementation Guidelines regarding Hybrid Capital Instruments (CP 27). The main concerns revolve around the potential negative impact of the proposed guidelines on the attractiveness of hybrid Tier 1 securities to fixed income investors, the clarity and flexibility of the rules, and the need for harmonization across the EU.

Main Views and Key Points

A. Permanence

I. Incentives to redeem

• ESBG considers the guidelines on "incentives to redeem" generally clear, but suggests further elaboration.
• A concrete example is needed to clarify the functioning of the "cap on the conversion ratio" in the case of a "principal stock settlement mechanism".
• The reference to "perception of market participants" is seen as problematic and should be removed.
• ESBG urges CEBS to allow for re-classification of hybrid instruments based on their overall configuration, not solely on the presence of redemption incentives.
• They propose that paragraph 58 be revised to reflect this.

II. Supervisory consent to a call or redemption of a hybrid instrument

• ESBG believes the minimum information required from institutions is excessive and not justified.
• They suggest using ICAAP results as a basis and avoiding double notification duties.
• The requirement to submit documentation "well in advance" should be specified with a clear control interval.
• The list in paragraph 64 should be treated as a reference, not a checklist.
• A 3-year planning horizon is proposed instead of the 5-year one.
• It should be clear that documentation is not required if the instrument has been replaced by capital of at least the same or better quality.

III. Supervisory guidance on buy backs

• ESBG argues that buy-backs are not typical for hybrid instruments and should not be regulated separately.
• They suggest that buy-backs should be less restrictive than redemptions and not require supervisory approval.
• If buy-backs are to be allowed before five years, they should be subject to strict conditions and prior approval.
• ESBG supports a minimum limit for repurchased instruments, but proposes increasing it from 5% to 10% of the relevant issuance.
• The limit should be applied as a general rule, not at the discretion of supervisory authorities.

B. Flexibility of payments

I. Supervisory request for the cancellation of payments

• ESBG suggests clarifying the definition of "distributable items".
• They argue that coupon payments should not be subject to cancellation based on estimations, as it could lead to supervisory liability.
• A level playing field is essential to prevent differential treatment by national authorities.

II. Flexibility of payments - other features of hybrid instruments (e.g. dividend pushers and stoppers)

• ESBG supports the use of dividend pushers and stoppers, arguing that restrictions would reduce transparency and discourage investment.
• They recommend against any limitations on these features.

III. Alternative Coupon Satisfaction Mechanisms (ACSM)

• ESBG suggests clarifying the definition of "without delay".
• They support the use of ACSM but believe the current guidelines may be too restrictive.

C. Loss absorbency

• ESBG emphasizes the importance of loss absorbency but questions the clarity and practicality of the definition.
• They suggest abandoning the term "viability" due to its ambiguity and potential misapplication during crises.
• The concept of "winding-up" in paragraph 100 is considered unclear and should be further specified.
• ESBG agrees with the definition of loss absorbency in going concern as given in paragraph 105.
• They propose that mechanisms should be disclosed to investors, not the market, and that the reference to Pillar 3 disclosures should be removed.

D. Limits

• ESBG supports the classification of hybrid instruments into three buckets based on loss absorbency.
• They suggest clarifying the conditions for mandatory convertibility and removing the reference to Pillar 2.
• Emergency situations should be more clearly defined to ensure harmonized application across the EU.

E. Hybrid instruments issued through an SPV

• ESBG agrees that hybrid instruments issued through an SPV should be treated similarly to own funds.
• They suggest removing the sentence that implies SPVs must be consolidated into the parent institution's accounts.
• Clarification is needed on how the issuer of an SPV can demonstrate minimized cross-border and legal risks.

Other Aspects

• ESBG requests clarification on the grandfathering clauses in Article 154 paragraphs 8 and 9, particularly whether they apply differently to innovative and non-innovative instruments.

About ESBG

• ESBG is an international banking association representing a significant portion of the European retail banking market.
• It focuses on promoting cross-border banking projects and advocating for its members' interests in EU institutions.
• Members include savings and retail banks, often organized in decentralized networks.