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EBF Summary of Comments on CEBS Draft Implementation Guidelines on Article 57(A) of CRD

Core Content

The European Banking Federation (EBF) has provided detailed comments on the CEBS draft implementation guidelines for instruments referred to in Article 57(A) of the Capital Requirements Directive (CRD). The comments highlight concerns regarding the scope, legal basis, and practical implications of the proposed guidelines.

Main Views and Key Points

1. Legal Basis and Scope of the Guidelines

• The EBF welcomes the principles-based approach of the draft guidelines but argues that it is ultra vires as it goes beyond the mandate of the European legislator to implement existing legislation.
• The guidelines anticipate future decisions from the Basel Committee on the definition of Own Funds, which is premature given the ongoing consultation process.
• Anticipating Basel Committee decisions may create a competitive disadvantage for EU banks by potentially accelerating the implementation date of new standards.

2. Legal Alignment with CRD and Recital 4

• The guidelines misinterpret the definition of "subscribed capital" in Article 22 of the Banking Accounts Directive, which includes equity capital regardless of its designation.
• The EBF argues that the proposed criteria (e.g., exclusion of instruments with capped distributions, exclusion of SPV-issued instruments) lack legal support in Article 57(A) or Recital 4.
• The requirement that redemption and buy-backs must be subject to prior supervisory approval is not required under CRD2.
• The interpretation of Article 57(A) regarding loss absorbency in liquidation is not aligned with the wording of the directive.

3. Grandfathering Arrangements

• The EBF emphasizes the importance of grandfathering rules to ensure a smooth transition to new standards.
• Grandfathering should include State Aid arrangements and cover Government Injections of Core Capital.
• Instruments with privileges attached should not disqualify other eligible core capital instruments.
• The EBF notes the confusion in the market due to the lack of consistency between CRD2 (with grandfathering), CP 33 (without grandfathering), and the Basel Committee's Resilience paper (with partial grandfathering).

4. Detailed Comments on Specific Criteria

1. Restriction on Financing Purchases by Third Parties of Own Shares (Criterion 2)

• The EBF suggests clarifying that the objective is to prevent financial engineering that converts debt into equity.
• It does not preclude normal banking relationships with institutional investors or retail customers who may hold shares and credit facilities.

2. Buy-backs

• The EBF disagrees with making buy-backs subject to prior supervisory approval, as this conflicts with national company law.
• It argues that deductions from own funds should only occur after the buy-back is completed, not based on estimated amounts.
• The EBF supports the smooth operation of buy-backs to hedge variable remuneration, which is a key part of CRD III.
• It calls for allowing market making activities, up to a certain percentage (e.g., 5%–10%) of the issued amount of an instrument.

3. Voting Rights

• The EBF agrees that voting rights are irrelevant unless they create privileges for certain classes of shares.
• It supports the idea that different voting rights should not affect loss absorbency capacity.

4. Flexibility of Payments

• The EBF opposes the requirement that distributions (e.g., dividends) must not be linked to the amount paid in at issuance.
• It points out that some core Tier 1 instruments in European banks do have such links and that this requirement would exclude certain fixed income investors.
• The EBF calls for the deletion of Paragraph 66 and 70, which restrict the behavior of dividends and require fully discretionary payments.