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European Banking Federation (EBF) Summary on CEBS Consultation Paper on Hybrid Capital Instruments

Core Content

The European Banking Federation (EBF), established in 1960, represents the interests of approximately 5000 European banks, including large and small, wholesale and retail, local and cross-border financial institutions. The EBF supports EU policies aimed at promoting a single market in financial services and banking, and it advocates for free and fair competition in both EU and global markets. It also emphasizes the importance of efficiency and competitiveness for banks.

The EBF has provided detailed feedback on the CEBS Consultation Paper titled "Implementation Guidelines regarding Hybrid Capital Instruments," which outlines new regulatory provisions under the Capital Requirements Directive (CRD). The EBF's comments focus on the clarity, flexibility, and prudential implications of the proposed guidelines.

Main Points

• Commendation of CEBS: The EBF commends CEBS for producing clear and well-assessed guidelines that help market participants understand the new rules.
• Buy-back Restrictions: The EBF believes the proposed restrictions on buy-backs of hybrid instruments are overly stringent and not mandated by recent CRD amendments or Basel Committee recommendations.
• Flexibility in Capital Management: The EBF argues that buy-backs should not be subject to prior supervisory approval unless under exceptional circumstances, and that they should be allowed to improve capital quality and manage liabilities effectively.
• Solvency and Market Conditions: The EBF supports the idea that supervisory approval for buy-backs should be based on the bank's current capital position and not require long-term projections or stress tests.
• Market Making and Smoothing: The EBF suggests that the proposed 5% cap on repurchased instruments may be too restrictive and advocates for a more flexible approach, especially for small issues.
• Dividend Pushers and Stoppers: The EBF agrees that these mechanisms are necessary for the marketability of hybrid instruments but believes the Consultation Paper over-specifies their conditions.
• ACSM (Additional Capital Substitution Mechanism): The EBF supports the idea of using ACSM as a substitute for coupon or dividend payments, but emphasizes the need for flexibility in timing and legal discretion.
• Loss Absorbency: The EBF generally agrees with the definition of loss absorbency in going concern but is concerned about the overly detailed conditions that may hinder recapitalization and reduce regulatory convergence.

Key Issues and Recommendations

A. Permanence of Hybrid Instruments

• Incentive to Redeem: The EBF opposes the idea that an incentive to redeem is fixed at the issue date and cannot be reversed. They argue that instruments not called should be reclassified based on their current status.
• Reclassification: They recommend that instruments not called should be moved from the 15% bucket to the 35% or 50% bucket, depending on their characteristics.
• SREP and ICAAP: The EBF supports the integration of applications for redemption within the SREP and ICAAP framework, but suggests reducing the data submission burden and shortening the time horizon for projections to two years.
• Stress Testing: The EBF recommends that stress tests conducted within ICAAP should be used instead of requiring separate stress tests for redemption applications.
• Decision Timeframe: They suggest that competent authorities should be able to make decisions within one month.

B. Buy-backs of Hybrid Instruments

• Regulatory Flexibility: The EBF believes that buy-backs should be allowed before five years if the bank's capital position is sufficient and the transaction is prudential.
• Replacement Requirement: They argue that requiring replacement with instruments of the same or better quality is unnecessary and could lead to lower capital quality.
• Market Making Exception: The EBF supports the idea of allowing limited buy-backs for market making, but recommends a higher cap than the 5% proposed, especially for small issues.
• Impact of Buy-backs: They emphasize that buy-backs do not result in capital depletion and are beneficial for capital restructuring and market stability.

C. Flexibility of Payment

• Coupon and Dividend Payments: The EBF opposes the requirement that coupons or dividends be paid only from distributable items, as it has accounting and tax implications and is not relevant to regulatory capital.
• Dividend Pushers and Stoppers: They agree that these mechanisms are important for marketability but suggest that the Consultation Paper over-specifies their conditions.
• ACSM Mechanisms: The EBF supports the use of ACSM but recommends flexibility in the timing of its fulfillment and legal discretion for national regulators.

D. Loss Absorbency

• Liquidation and Going Concern: The EBF believes the term "winding-up" should be clarified to ensure a level playing field across jurisdictions.
• Recapitalization Flexibility: They oppose the detailed conditions on recapitalization that may hinder flexibility and suggest that the focus should remain on the core loss absorption criteria.
• Trigger Points for Write-downs: The EBF recommends removing specific trigger points for write-downs or conversions, as these should remain at the discretion of the institution and its supervisors.

Conclusion

The EBF advocates for a balanced, flexible, and market-oriented approach to the regulation of hybrid capital instruments. They emphasize the importance of maintaining regulatory convergence and avoiding competitive distortions. The EBF believes that the proposed guidelines should be adjusted to reflect the practical realities of capital management and market conditions, ensuring that banks have the necessary tools to efficiently manage their capital structure while meeting prudential requirements.