EBA欧洲银行-AT1-Report-October-2016_16页_378kb

EBA Report Summary: Monitoring of AT1 Instruments in EU Institutions (Second Update)

Core Content

The European Banking Authority (EBA) published a second update of its report on the monitoring of Additional Tier 1 (AT1) instruments issued by European Union (EU) institutions. This report is based on the review of 33 AT1 issuances, totaling EUR 35.5 billion, between August 2013 and December 2015. The report outlines the EBA's findings and recommendations to ensure the prudential quality of AT1 instruments, in line with the Capital Requirements Regulation (CRR) and the Commission Delegated Regulation (EU) No 241/2014 (RTS on own funds).

Main Purpose

The report aims to:

• Inform external stakeholders about the EBA's ongoing monitoring of AT1 instruments.
• Highlight provisions that should be avoided or revised in future issuances.
• Support the development of standardised terms and conditions for AT1 instruments.

Key Information

• Regulatory Basis: The CRR (Article 80) and the RTS (Commission Delegated Regulation (EU) No 241/2014) are the main regulatory frameworks guiding the monitoring of AT1 instruments.
• Monitoring Scope: The EBA has focused on reviewing selected AT1 issuances and assessing their terms and conditions against regulatory provisions.
• Instrument Types: The review included 11 issuances under a conversion mechanism and 22 under a write-down mechanism.
• Standardised Templates: The EBA has developed standardised templates for AT1 instruments, which are meant to cover prudential aspects and complement this report.

Main Findings and Recommendations

1. Regulatory Calls

• Acceptable: Only full regulatory calls are acceptable, not partial ones.
• Tax Calls: Tax calls should be based on a material and non-foreseeable change in tax treatment, not on the risk of additional payments.
• Guidance: Provisions should avoid suggesting that tax events are triggered by insubstantial risks.

2. Redemption and Repurchase

• Revocation of Redemption Notice: If a trigger event notice is issued after a redemption notice, the redemption notice should be revoked and void.
• No Unlimited Repurchase: Purchases of AT1 instruments are not possible at any time; they are subject to limits and specific conditions.
• Market Making: Reference to market making is acceptable, provided it includes prior permission and limits from the RTS.

3. Event of Default

• Non-Payment Not Default: Non-payment of any amount due should not be considered an event of default.
• Tax Gross-Up Clauses: These should be activated by a local tax authority decision, not the investor. They should only apply to dividend/coupon withholding tax and not to principal.

4. Write-Down or Conversion

• One-Cent Floor: The one-cent floor for write-downs should not be included in AT1 instruments, as it may conflict with the CRR’s loss absorption requirements.
• Permanent Write-Down: If conversion is not possible, a permanent write-down provision should be included.
• Conversion in Holding Company Shares: In such cases, an emergency permanent write-down clause is prudent.

5. Other Issues

• Pre-emption Rights: Shareholders may have pre-emption rights to buy shares from conversion, but this should not be encouraged as it may imply dilution.
• Clarity in Terms: Provisions should be clearly worded and not use ambiguous language such as 'it is expected that' or 'if required by the regulation'.
• Avoid Ambiguity: Terms should not imply that the trigger event is calculated only at specific reporting dates or based on the bank’s discretion.

6. Contingent Clauses

• Contingent Settlement Mechanisms: These clauses, which might require interest payments if AT1 status is lost, are not recommended.
• Reasons for Disallowance:
  • They introduce complexity.
  • They may lead to unintended consequences, such as constraining regulatory changes.
  • They could be interpreted as making the redemption mandatory, which is not acceptable.
• Alternative Concepts: Shifting the coupon payment to a principal payment mechanism is also not acceptable.

7. Provisions for Future Issuances

• Adjustable Trigger Levels: The EBA warns against provisions that allow the issuer to increase the trigger level at any time, as this may be seen as a new issuance and increase complexity.
• Contingent Conversion Convertibles: These are not recommended due to the risk of undermining the simplicity of terms and conditions.

Conclusion

The EBA emphasizes the importance of simplicity and clarity in the terms and conditions of AT1 instruments. While some provisions may be acceptable, the report recommends avoiding those that increase complexity, create uncertainty, or may conflict with regulatory requirements. The EBA continues to monitor and engage with institutions and market participants to ensure the prudential quality of AT1 instruments and promote convergence in their design.