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EBA Consultation Paper on Draft RTS on Own Funds – Summary

Core Content

The European Banking Authority (EBA) published a consultation paper on the draft Regulatory Technical Standards (RTS) related to own funds as part of its mandate to develop binding technical standards under the new Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD). The purpose of the RTS is to harmonize and improve the regulatory framework for own funds across the European Union, ensuring consistency, transparency, and the permanence of capital instruments.

The EBA aims to create a single rulebook for the banking sector, which is aligned with Basel III principles, while being proportionate to the different types of financial institutions. The consultation process was part of the EBA's broader task to draft over 100 binding technical standards and 20 guidelines in support of the CRR/CRD legislative package.

Main Viewpoints

• Harmonization and Proportionality: The EBA is committed to maximizing harmonization across the EU while ensuring that the standards are proportionate to the nature and size of the institutions involved.
• Uniformity and Transparency: The RTS are designed to ensure a uniform approach to the treatment of own funds, including capital instruments, deductions, and supervisory requirements, which will enhance transparency and facilitate cross-jurisdictional comparisons.
• Loss Absorbency and Permanence: A key focus is on increasing the loss absorbency of hybrid instruments and ensuring the permanence of capital by defining clear rules for redemption, write-downs, and write-ups.
• Supervisory Oversight: The RTS emphasize the role of competent authorities in assessing and approving changes to capital instruments, including redemptions, reductions, and repurchases, to ensure prudential soundness.

Key Information

Published RTS on Own Funds (April 4, 2012)

A total of 14 RTS were published for consultation, covering various aspects of own funds, including:

• Instruments:

  • Incentives to redeem (Article 19)
  • Conversion and write-downs/write-ups (Articles 20–22)
  • Meaning of minimal and insignificant (Article 34)

• Deductions:

  • Foreseeable dividends (Article 2)
  • Deduction of defined benefit pension fund assets (Article 38)
  • Indirect holdings arising from index holdings (Article 71)

• Cooperatives:

  • Limitations on redemption (Article 25(2) point b)
  • Redemption of own funds instruments by mutuals and cooperatives (Article 27(6))

• General Requirements/Other Aspects:

  • Supervisory consent for reducing own funds (Articles 27–32)
  • Temporary waiver from deduction (Article 33)
  • Transitional provisions (Articles 461(4)/465(3))

Specific RTS Highlights

• Incentives to Redeem: The RTS defines situations that qualify as incentives to redeem, such as step-ups, mandatory conversions, and marketing that suggests redemption. These rules are in line with Basel III principles.
• Loss Absorbency Mechanisms: Three types of mechanisms are outlined: conversion, permanent write-down, and temporary write-down. Institutions must notify the competent authority and holders of instruments immediately upon a trigger event and determine the amount to be written down or converted within one month.
• Dividend Deductions: Foreseeable dividends are deducted based on a hierarchy: first, formal decisions on distributions; second, dividend policy; third, historical payout ratio. In the absence of a formal decision, the amount is calculated using the average of the previous three years or the year before.
• Special Purpose Entities (SPEs): The EBA is considering deleting the 0.5% threshold for "minimal and insignificant" assets in SPEs, which could reduce the burden on institutions.
• Cooperatives and Mutuals: The RTS clarifies that institutions may defer or limit redemption of own funds instruments if justified by their prudential situation. Supervisors can require modifications to redemption policies if they are not appropriate.
• Supervisory Consent: Institutions must obtain prior approval from supervisors before announcing redemptions, reductions, or repurchases. They are required to provide detailed information to the competent authority 3 months in advance, with possible exceptions for exceptional circumstances.
• Temporary Waivers: The EBA is considering a maximum time limit of 5 years for temporary waivers from deduction, which are only applicable to new holdings under financial assistance plans.

Draft ITS on Disclosure for Own Funds

A separate Draft Implementing Technical Standards (ITS) was also proposed, focusing on disclosure requirements for own funds. The ITS aims to:

• Enhance transparency of regulatory capital held by European institutions.
• Complement the first set of RTS published in April.
• Ensure a uniform approach to disclosure across jurisdictions.
• Allow detailed assessments of banks' capital positions and facilitate cross-jurisdictional comparisons.

The ITS includes:

• A general own funds disclosure template.
• A transitional disclosure template for the period 2013–2017.
• A template describing the main features of capital instruments.
• A balance sheet reconciliation between financial statements and regulatory own funds data.

Next Steps and Timeline

• Consultation Period: Ends on 31 July 2012 for the draft ITS.
• Separate Consultations: Further consultations on specific articles of the CRR are planned, depending on ongoing negotiations.
• Deadline for RTS Submission: The final RTS on own funds are expected to be submitted to the EU Commission by 01/01/2013.
• Finalization Plan: The technical standards are planned to be finalized in Q4 2012, with the objective of creating an integrated draft Regulation for own funds.

Conclusion

The EBA's consultation paper outlines a comprehensive approach to regulating own funds, emphasizing harmonization, transparency, and prudential soundness. The publication of 14 RTS and the draft ITS represents a significant step towards the completion of the EU single rulebook on capital requirements. The finalization of these standards is expected to enhance the quality and quantity of regulatory capital across the European banking sector.