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EAPB Comments on CEBS Consultation Paper on Hybrid Capital Instruments

Core Content

The European Association of Public Banks (EAPB) has provided detailed comments on the Committee of European Banking Supervisors (CEBS) consultation paper on implementation guidelines for hybrid capital instruments. The EAPB represents 34 public banks and financial institutions across Europe, with a combined balance sheet of approximately EUR 3,500 billion and a market share of about 15%.

Main Views and Key Information

1. Principles-Based Approach

• The EAPB generally supports the principles-based approach taken by the Commission, the European Parliament, and the Council in harmonizing rules for hybrid capital instruments.
• This approach provides sufficient flexibility for institutions given the rapid development in the field and national differences.
• CEBS is encouraged to provide more guidance on the application of these principles without exceeding the legal requirements under CRD II.

2. Incentives to Redeem

• The guidelines on incentives to redeem are considered sufficiently clear by EAPB members.
• The reference to the "conversion ratio" in the context of a principal stock settlement mechanism is ambiguous and needs clarification.
• The EAPB opposes the definition of incentives to redeem based on market perception, as it is subjective and difficult to standardize.
• They suggest that institutions should document their own estimates and coordinate with auditors or supervisory authorities in doubtful cases.
• Paragraph 58 is criticized for being too restrictive and should be adjusted to allow for reclassification of hybrid instruments if necessary.

3. Supervisory Consent for Redemption

• The EAPB finds the information requirements for the approval process excessive and not justified.
• They argue that the (audited) results of the ICAAP (Internal Capital Adequacy Assessment Process) should be recognized as sufficient.
• They suggest that the assessment period should be clearly defined and limited to ensure reliability.
• The EAPB calls for a general rule instead of national discretion in cases of deviation from buy-back guidelines.
• They propose that the limit on repurchased instruments should be based on the total amount of all hybrid instruments, not individual issues.

4. Flexibility of Payments

• The EAPB supports the restriction on the use of dividend pushers and stoppers, but emphasizes the need for clarity in the guidelines.
• They believe that the cancellation of coupon or dividend payments should be based on ICAAP criteria rather than subjective forecasts.
• They suggest that the ICAAP should be the primary basis for any decision on payment cancellation, to avoid unnecessary risks and ensure consistency.

5. Loss Absorbency

• The EAPB does not support the redefinition of "insolvency" for regulatory purposes, as national insolvency rules should apply.
• They agree with the definition of loss absorbency in going concern as outlined in the consultation paper.
• The guidelines on loss absorbency mechanisms are considered appropriate, and they welcome the possibility to combine mechanisms for recapitalization.
• They believe that differentiated ranking of hybrid capital instruments can enhance transparency and improve the quality of own funds, as long as it is disclosed to investors.

6. Limits on Hybrid Instruments

• The EAPB finds the guidelines on the assignment of hybrid instruments to the three capital limits sufficiently clear.
• They suggest the inclusion of illustrative examples to clarify the functioning of the conversion ratio.
• They oppose the mandatory conversion of hybrid instruments, arguing that it is not proportionate and could reduce the attractiveness of such instruments to investors.
• They call for a clearer definition of "emergency situation" to ensure convergence across the EU and suggest including mergers or acquisitions as such cases.
• They argue that temporary exceeding of limits should not be restricted to reorganization or rescue scenarios.

Conclusion

The EAPB emphasizes the importance of hybrid capital instruments for banks and urges CEBS to ensure they remain attractive to investors. They advocate for a principles-based, flexible approach that aligns with existing legal frameworks and avoids unnecessary restrictions. The association also calls for greater clarity, consistency, and transparency in the guidelines to support a level playing field across the EU.