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Anglo Irish Bank Comments on CEBS' Draft Proposal for a Common EU Definition of Tier 1 Hybrids

Core Content

Anglo Irish Bank has provided detailed feedback on the CEBS draft proposal for a common EU definition of Tier 1 hybrid instruments. The bank supports the objective of harmonizing and simplifying hybrid capital rules across Europe but has raised several concerns regarding the specific proposals outlined.

Main Concerns and Views

Principle-Based Approach

• Anglo believes that a principle-based approach is preferable to a prescriptive one for defining Tier 1 hybrids.
• This approach would allow individual European regulators to interpret the guidelines in line with their national legal, insolvency, and tax frameworks.
• A prescriptive framework may lead to divergence in bank structures rather than convergence, as it does not account for country-specific differences.

Competitive Disadvantage and Basel Coordination

• The timeframe for implementing the proposals could place European banks at a competitive disadvantage compared to non-European peers.
• Anglo recommends that the EU wait for Basel's global review on capital definitions before legislating and redefining capital, to avoid double adaptation within a short period.

Impact on Fixed Income Investors

• The proposed write-down and conversion features may conflict with the investment restrictions of fixed income investors.
• These features could reduce the attractiveness of hybrid instruments to investors, especially in a market that now demands certainty and protection.
• The relative ranking between common equity and other Tier 1 instruments is also questioned, as it may reverse the subordination intended by the rules.

Loss Absorbency

• Anglo asserts that existing hybrid instruments in Ireland already meet the loss absorbency requirements on a going concern basis.
• The write-down or conversion features proposed by CEBS are not necessary and could complicate the ability of banks to manage their capital effectively.
• In practice, conversion into common equity is unlikely to be used, as it would lead to liquidation of common shares by fixed income investors, which is undesirable during stress.

Limits to Inclusion in Tier 1

• The Sydney Press Release proposed a 15% limit on non-common equity Tier 1 instruments at issuance.
• Anglo strongly supports applying this limit at issuance, rather than at any time, to prevent double negative impacts on capital during stress.
• The proposed 70% or 50% limits are seen as confusing and hinder harmonization.
• A 50% limit is suggested as a standard across the EU, given that it is already allowed in six countries representing over 70% of current hybrid capital issuance.
• The two-tier approach may lead to a cliff effect, where institutions with historically strong capital ratios face sudden reductions in hybrid capital during stress, increasing capital volatility.

Grandfathering

• Anglo notes that all Irish hybrid instruments have met the loss absorption, permanence, and payment flexibility criteria under the ACI BSD S 1/04 legislation.
• The proposed grandfathering is seen as inadequate, as it removes the undated nature of these instruments.
• The bank suggests that grandfathering should be unqualified, allowing all pre-dated instruments that were previously eligible to remain so.
• The current proposal may encourage premature redemption of instruments, leading to increased execution risk and market distortion.

Conclusion

Anglo appreciates the opportunity to comment on the CEBS proposal and believes that a principle-based approach, harmonization of limits, and unqualified grandfathering should be considered as initial steps. A second phase of harmonization should focus on loss absorption and payment flexibility, in line with Basel's recommendations.