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ABI Summary of CEBS Draft Proposal for a Common EU Definition of Tier I Hybrids

1. General Outlook

ABI welcomes the opportunity to comment on the CEBS draft proposal aimed at harmonizing the treatment of hybrid instruments as eligible capital across EU Member States. ABI aligns with the European Banking Federation's (EBF) analysis and supports a principle-based framework for hybrid instruments. The current draft, however, is perceived as rules-based and overly detailed, which may create implementation challenges and potentially hinder the issuance of hybrid securities.

ABI advocates for a flexible approach that allows Member States to interpret the principles in line with their domestic legal and regulatory frameworks. The concept of "permanence" should be viewed in a broader context rather than being tied strictly to contractual undating, as this may not accurately reflect the substance of the instrument.

2. Permanence

2.1 Undated

ABI argues that the requirement for instruments to be "undated" is unnecessary and could complicate the classification of certain hybrid structures. For example:

• Italian hybrid securities with maturity linked to the issuer's life or liquidation date.
• Mandatorily convertible securities, which are dated but still align with the permanence concept.

The key should be whether the security can be redeemed by the issuer, not whether it is undated. This is crucial for tax analysis and aligns with the "substance over-form" principle recommended by CEBS.

2.2 Callable

The Draft Proposal outlines call options with minimum first call dates of five and ten years. ABI suggests clarifying that:

• Early redemption options may be exercised at any time, including before the first call date.
• There is flexibility for different trigger events beyond regulatory and tax changes.

ABI emphasizes that, given the need for prior supervisory consent, each Member State should have the discretion to define appropriate triggers on a case-by-case basis, considering market-specific factors such as rating agency or accounting considerations.

3. Loss Absorption

3.1 Ranking

ABI believes the ranking of hybrid securities should be:

• No higher than senior to share capital (including ordinary, savings, and privileged shares in Italy).
• Pari passu with all other securities that are not share capital.

This ensures that hybrids are appropriately subordinated to other less subordinated instruments while being senior to equity, which is consistent with the market understanding.

3.2 Write-down

ABI objects to the provision that allows redemption only at the written-down amount. This could lead to tax implications and uncertainty regarding future claims. The ability to redeem at full nominal value, subject to prior consent, is more consistent with the principle of permanence and would reduce legal and tax complexities.

4. Flexibility of Payments

4.1 Breach of Minimum Capital Requirements

ABI finds the provision allowing dividend payments to "push" coupon payments inconsistent with the principle that share capital is junior to hybrids. This could lead to unfair treatment of hybrid investors and affect pricing and market reliability.

A suggested solution is to limit the period during which a dividend can "push" coupon payments, such as to the 6-month period prior to the coupon payment date.

4.2 Payments Only Out of Distributable Profits

ABI clarifies that the Draft Proposal should not imply that distributions can only be made from distributable profits, as this could restrict the flexibility of hybrid instruments.

4.3 Payments While Principal is Written Down

ABI considers the provision that stops ongoing payments while principal is written down as overly conservative. It suggests that the trigger for deferring interest should be the same as the loss absorption requirement, to avoid discrepancies between Member States and ensure a level playing field.

5. Limits to Inclusion into Tier 1

ABI raises concerns about the proposed link between the inclusion of hybrid capital and the bank's Tier 1 ratio. The "cliff effect" could make it difficult for banks to issue or maintain hybrid instruments during a crisis, creating a competitive disadvantage for well-capitalized institutions.

ABI suggests that the 15% limit should apply only to true innovative instruments with a clear redemption incentive. The 50% one-off limit for hybrid capital should be introduced, considering prudential and market realities.

6. Grandfathering

ABI agrees with the EBF position paper on this matter, supporting a grandfathering approach to ensure continuity and fairness for existing instruments.