EBA欧洲银行-Public-hearingUPDATE-OF-THE-ADDITIONAL-TIER-1-REPORT-18-May-2015_17页_1mb

EBA Additional Tier 1 Report Summary (May 2015)

Core Content

The European Banking Authority (EBA) has updated its guidance on Additional Tier 1 (AT1) instruments, focusing on the practical implementation of the eligibility criteria under the Capital Requirements Regulation (CRR). The report outlines the EBA's stance on various aspects of AT1 instruments, including triggers, tax provisions, pre-emption rights, contingent clauses, and loss absorption mechanisms, in order to ensure compliance and consistency across the EU banking sector.

Main Objectives

• Ensure compliance with AT1 eligibility criteria in practice, not just in form.
• Promote simplicity and clarity in the terms and conditions of AT1 instruments.
• Encourage convergence in the design of AT1 provisions, without restricting the different forms of loss absorption (e.g., write down or conversion) or trigger levels allowed by the CRR.

Key Topics and Guidance

1. Triggers for Regulatory Calls

• The EBA clarifies that regulatory calls on the full amount of an AT1 instrument are acceptable regardless of whether the trigger was a partial or full derecognition of the instrument from Additional Tier 1.
• A change in the regulatory assessment of tax effects of a write down is not a valid trigger for a regulatory write down.
• The EBA emphasizes that grandfathered instruments with partial de-recognition should be treated consistently with future rules.

2. Tax Gross Up

• Tax gross up provisions are acceptable under certain conditions:
  • Activated by a local tax decision, not by the investor.
  • Increased payments should not exceed distributable items.
  • Only applicable to changes in withholding tax related to distributions (e.g., dividends or coupons).

3. Pre-emption Rights for Shareholders

• The EBA considers pre-emption rights acceptable if they:
  • Allow current shareholders to purchase newly issued shares resulting from conversion.
  • Simplify the application of fit and proper rules after conversion.
  • Ensure stability in the shareholders’ structure.
• It is noted that write down instruments do not involve dilution, and thus do not require such rights.

4. Contingent Clauses

• Contingent clauses, which make interest payments mandatory upon loss of AT1 status, or change the instrument to subordinated debt permanently, are not acceptable.
• Reasons for rejection:
  • They introduce complexity and unintended consequences.
  • They may undermine the simplicity of AT1 instruments.
  • They could lead to financial innovation that complicates the regulatory framework.
• The EBA reaffirms its previous reservations and recommends disallowing such clauses.

5. Triggers in a Banking Group

• The EBA emphasizes that triggers should align with the solvency test level of the issuing entity (solo, sub-consolidated, or consolidated).
• QA 385 conclusions remain valid:
  • Instruments issued by a subsidiary should include a trigger based on the subsidiary’s solvency requirements.
  • If the parent is a holding company, the subsidiary’s issuance should include a group trigger (based on the parent’s solvency) in addition to other triggers.
• Recognition at the parent level is only possible if the trigger is based on the parent’s solvency and minority interest rules apply.
• The parent’s own issuance is not affected by this guidance.

6. Loss Absorption by Instruments with Different Triggers

• Instruments with different trigger levels (e.g., 5.125% and 7%) can coexist.
• Loss allocation should be clearly defined in terms and conditions.
• If CET1 drops suddenly below the lower trigger, both instruments should absorb losses.
• Practical allocation:
  • Lower trigger instruments absorb losses until CET1 is above the lower trigger.
  • Higher trigger instruments absorb losses until CET1 is above the higher trigger.

7. Other Topics Added

• Trigger events take precedence over redemptions.
• Trigger events should not be prevented by other events.
• Unambiguous language is required for supervisory approval.
• Payments and write-ups should be truly discretionary, not linked to other obligations.
• Clarity on interaction between loss absorption of AT1 and Tier 2 instruments is needed.
• The relevant write-up amount should be the lower of the amounts at the applicable solvency levels (individual, sub-consolidated, or consolidated).

Way Forward

• The final draft report from 4 May includes updated guidance on previously identified topics and introduces new issues arising from AT1 instrument issuances.
• The final version will incorporate technical comments from the public hearing.
• Further updates may be published as needed, depending on new developments.
• Standardised provisions in a template format, similar to the 2011 BCCS, may be introduced to enhance clarity and convergence.

Conclusion

The EBA aims to ensure that AT1 instruments are prudentially sound, clearly defined, and consistently applied across the EU. The report highlights the importance of simplicity, convergence, and genuine loss absorption in the design of AT1 instruments, while disallowing contingent clauses and encouraging clarity in terms and conditions.