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CEBS Public Hearing Summary: Consultation Paper on Capital Instruments (Article 57(a) of Directive 2006/48/EC recast)

1. Core Content

On 23 February 2010, the Committee of European Banking Supervisors (CEBS) held a public hearing to present its draft proposal for implementation guidelines on capital instruments referred to in Article 57(a) of the recast Directive 2006/48/EC. The hearing was chaired by David Guillaume, Chair of the CEBS Subgroup on own funds. The discussion aimed to align supervisory practices across the EU and ensure consistency with the Capital Requirements Directive (CRD) amendments.

The draft proposal focuses on four main areas: the definition of capital, permanence, flexibility of payments, and loss absorbency. CEBS emphasized the importance of maintaining high-quality capital instruments and ensuring that they meet strict eligibility criteria.

2. Main Objectives and Key Points

2.1. Definition of Capital and Permanence

• CEBS clarified that capital instruments should not be redeemable, but reduction of capital under company law is allowed under exceptional circumstances.
• The definition of capital under Article 57(a) and Recital 4 was discussed, with a focus on buy-backs and redemption of mutual/cooperative shares.
• CEBS indicated that it would consider specific cases based on written feedback, while ensuring non-interference with national laws.
• Instruments not classified as equity under national law may not be eligible as core capital instruments unless they meet all nine criteria outlined in the guidelines.

2.2. Flexibility of Payments

• Participants raised concerns about caps on payments and fixed coupons.
• CEBS stated that the cap represents a commitment by credit institutions to make payments, and that fixed coupons are aligned with Basel proposals.
• There was a noted inconsistency between CEBS and Basel regarding preferential dividend rights, but CEBS emphasized that its guidelines are based on current CRD provisions.

2.3. Loss Absorbency

• CEBS clarified that different categories of shares can exist, but they must share losses pari passu.
• Only the most subordinated instruments are eligible as core capital.
• Instruments that do not rank pari passu with ordinary shares during liquidation are classified as hybrid instruments under Recital 4 of the Directive.

2.4. Grandfathering

• The scope of grandfathering was discussed, including whether it applies to hybrid or core capital instruments.
• CEBS emphasized that grandfathering provisions apply to both types, and that they will be further discussed with the EU Commission and in light of CRD IV and Basel proposals.
• Participants expressed concerns about the implementation date, particularly whether it would apply before the end of 2010.

3. Implementation Timeline and Basel Alignment

• CEBS stated that the implementation timeline follows the CRD provisions.
• The guidelines are closely aligned with Basel's Core Tier 1 instruments, but CEBS is open to revising them based on Basel's progress.
• Some participants requested a shorter version of the guidelines, but CEBS maintained that the current draft provides a clear and comprehensive interpretation of the CRD.
• The final version of the document, incorporating public feedback, is expected to be published by the end of the first semester of 2010.

4. Conclusion and Next Steps

• All written comments on CP33 were to be submitted by 31 March 2010.
• Comments will be published on CEBS's website unless the respondents request otherwise.
• CEBS remains committed to converging supervisory practices and maintaining the quality of core capital instruments, while remaining flexible to future changes in accounting and regulatory standards.