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Summary of the Report on Quantitative Analysis of Hybrids in the European Economic Area (EEA)

Core Content

This report presents a quantitative analysis of the characteristics of hybrid capital instruments within the EEA, as identified by the CEBS June Surveys. It aims to provide an empirical snapshot of the economic features of these instruments, which combine elements of debt and equity. The report does not offer recommendations but outlines the current state of hybrid instruments and their eligibility for original own funds.

Main Findings

• Hybrid Definition: Hybrids include innovative instruments (e.g., with step-up clauses), non-innovative instruments, and non-cumulative perpetual preference shares.
• Total Hybrid Amount: As of 31 December 2006, the preliminary total amount of hybrids reported is approximately EUR 213 billion.
• Country Participation: 22 competent authorities provided data, while others (e.g., Bulgaria, Czech Republic) do not recognize hybrids as eligible original own funds.
• Currency Distribution: 56% of hybrids are denominated in EUR, 28% in USD, 14% in GBP, 1% in JPY, and 1% in other currencies.
• Issuance Method: 50% of hybrids are issued directly, and 50% through SPVs. Non-innovative instruments are more commonly issued through SPVs (66%).

Key Economic Characteristics

Permanence

• Undated Instruments: 95% of hybrids are undated, indicating a strong emphasis on permanence.
• Call Features: 90% of hybrids have call features, allowing the issuer to redeem after a minimum period (5–10 years), with prior supervisory approval.
• Minimum Redemption Periods:
  • 12 countries apply a 5-year minimum for non-innovative and 10-year for innovative instruments.
  • Cyprus, Luxembourg, and Norway apply a 10-year minimum for both types.
  • Some countries (e.g., Belgium) do not specify a minimum for non-innovative instruments.

Loss Absorption Capacity

• Deep Subordination: All hybrids are deeply subordinated, typically ranking pari passu with ordinary shares (5%) or senior only to them (74%).
• Principal Write-Down: 61% of hybrids do not allow write-down of principal, with this feature predominantly absent in non-innovative instruments (45%) and non-cumulative perpetual preference shares (97%).
• Convertibility: Only 1% of hybrids are convertible into ordinary shares, and 18% into non-cumulative perpetual preference shares.

Flexibility of Ongoing Payments

• Non-Cumulative Payments: 93% of hybrids are non-cumulative, meaning that payments can be deferred or canceled by the issuer.
• Voting Rights: 88% of hybrids do not have voting rights, suggesting limited influence on governance.

Supervisory Limits on Hybrid Inclusion

• Innovative Instruments: Most Member States apply a 15% limit, with some (e.g., Germany, Belgium) applying a 33% limit.
• Non-Cumulative Preference Shares: Some countries (e.g., Germany, Italy) do not allow them as original own funds, while others (e.g., UK, Belgium) apply a 33% limit or no limit.
• Maximum Limits: The maximum supervisory limit on hybrids across all categories is 50% in some countries, though not all.

Key Points

• The data is provisional, due to the short timeline and the possibility of double-counting.
• The report is part of a broader CEBS initiative, with a complete quantitative study expected to be finalized in May 2007.
• The Basel Press Release serves as a foundational reference for assessing hybrid eligibility, emphasizing permanence, loss absorption, and flexibility.

Table of Key Hybrid Characteristics

Conclusion

This report highlights the increasing complexity and volume of hybrid instruments in the EEA. It outlines the current regulatory landscape, the economic characteristics of these instruments, and the supervisory limits that apply. The findings are based on preliminary data and are intended to inform future discussions on hybrid capital instruments within the EU.