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CECA Position Paper Summary: Response to CEBS Consultation Paper (CP17)

Core Content

This document is a response from the Spanish Confederation of Savings Banks (CECA) to the CEBS Consultation Paper (CP17), which proposes a common EU definition of Tier 1 hybrid capital instruments. CECA represents 45 Spanish Savings Banks, which are significant players in the Spanish financial system, with total assets of €1.1 billion, 24,050 branches, and 124,139 employees as of 2007. These institutions are credit institutions operating as private enterprises and are subject to the same legislation as other credit institutions in the EU, including transparency, solvency, and consolidation requirements.

Spanish Savings Banks have long been involved in issuing hybrid instruments known as "participaciones preferentes," which already meet many of the criteria proposed in the CEBS Draft Proposal. CECA supports the harmonization of Tier 1 hybrid capital definitions across the EU but emphasizes the need for a transition period that accounts for the varying national legislations.

Main Objectives of Spanish Cajas

Spanish Savings Banks aim to:

• Provide universal financial services
• Ensure economic efficiency
• Promote competition and avoid monopolistic practices
• Contribute to welfare and redistribution
• Support regional and community development

These objectives are fulfilled through their "Obra Social" scheme, which channels surplus funds into community investment projects.

Key Comments on the CEBS Draft Proposal

I. Preliminary Comments

• The Sydney Declaration (1998) established conditions for hybrid instruments to qualify as Tier 1, but national regulations across the EU vary significantly.
• Spanish hybrid instruments already meet most of the conditions proposed in the CEBS Draft Proposal.
• CECA welcomes the harmonization approach but suggests that the transition period should consider national differences to maintain a level playing field.

II. Specific Comments

II.1. Permanence of Hybrids

• Hybrids may be callable with supervisory approval after 5 or 10 years, or in case of legislative/fiscal changes.
• CECA argues that permanence is not an essential condition for Tier 1 eligibility, as it does not necessarily improve financial soundness.
• They suggest reconsidering the permanence requirement since ordinary shares are not subject to such rules.

II.2. Conditions for Tier 1 Eligibility

• The CEBS proposal requires all hybrid instruments to meet all conditions simultaneously.
• CECA suggests clarifying that some conditions, such as step-ups, may not be accumulative or alternative.

II.3. Replacement with Capital of the Same or Better Quality

• The requirement for replacement with capital of the same or better quality is problematic for non-joint stock institutions.
• Spanish Savings Banks are private foundations and do not have equity.
• CECA recommends replacing the term "capital" with "instruments" to reflect the diversity of corporate governance structures.

II.4. Guarantee of the Issuance

• The CEBS proposal prohibits guarantees from the issuer or related entities.
• In Spain, preference shares often have such guarantees, which do not reduce the quality of the instruments.
• CECA suggests reconsidering this rule or introducing a special transition period for existing instruments.

II.5. Contradiction with Paragraph 43

• Paragraph 48 contradicts paragraph 43 regarding the seniority of hybrids.
• CECA believes this contradiction should be resolved by rewriting or removing the conflicting text.

II.6. Absorption of Losses

• The requirement for loss absorption is generally accepted but may not apply to all credit institutions.
• CECA highlights that the proposal assumes hybrids are issued by joint stock companies, which is not the case for all institutions.
• They recommend redrafting the relevant paragraphs to include other corporate governance structures.

II.7. Grandfathering

• CECA supports the transition period for existing hybrid instruments.
• They suggest that national supervisors should have the flexibility to apply "permanent grandfathering" for instruments that already meet the new criteria.
• This would help maintain consistency and avoid unnecessary disruption for institutions that have already adhered to strict standards.

Conclusion

CECA supports the CEBS Draft Proposal's goal of harmonizing Tier 1 hybrid capital definitions across the EU. However, they emphasize the importance of considering the legal and structural diversity of credit institutions, particularly in Spain, and recommend adjustments to the criteria for permanence, eligibility, and grandfathering to ensure fairness and practicality.