EBA欧洲银行-20070410FollowupofEBCmeetinginhybridcapitalinstrum_3页_154kb

CEBS Work on Hybrid Capital Instruments: Summary

Core Content

This document outlines the European Commission's request to the Committee of European Banking Supervisors (CEBS), chaired by Danièle Nouy, to advance work on the treatment of hybrid capital instruments within the EU. The objective is to achieve greater supervisory convergence in this area, which is crucial for ensuring a level playing field among financial institutions and maintaining a robust capital base in stressed market conditions. The Commission and the European Banking Committee (EBC) emphasized that the current divergent approaches require urgent attention and that the industry itself is increasingly calling for such alignment.

Main Areas of Focus

The Commission has outlined three main areas for CEBS to focus on in order to promote convergence:

1. Qualitative Features of Hybrid Instruments

CEBS is requested to develop general principles to guide supervisors in evaluating hybrid instruments for Tier 1 capital eligibility, based on the following three key features:

• Permanence:

  • Relationship with the maturity of the instruments
  • Call features and regulatory minimum period before early redemption
  • Redemption incentives
  • Use of principal stock settlement

• Loss Absorbency:

  • Level of subordination
  • Principal write-down mechanisms and relevant trigger events
  • Convertibility of principal

• Payment Flexibility:

  • Ability of the issuer to suspend payments
  • Existence of trigger events that may limit discretion
  • Use of alternative settlement mechanisms (e.g., new share issuance)

2. Quantitative Limits on Hybrid Instruments

CEBS should work towards further convergence in the quantitative limits applied by EU supervisory authorities to 'innovative' and 'non-innovative' hybrid capital instruments. These limits have a significant impact on the composition of banks' capital and are a key issue for regulatory consistency.

3. Mitigating Market Impact

CEBS is encouraged to consider ways to limit the potential negative impact on financial markets of a future common regulatory approach. One proposed solution is the introduction of a "grandfathering" provision for instruments already issued, allowing them to be treated under existing rules even if new regulations are introduced.

Key Information

• Background: The EBC meeting on 27th March 2007 highlighted the need for supervisory convergence on hybrid capital instruments, which are valued at approximately €230 billion in the EU.
• Prudential Principles: CEBS is advised to prioritize the principle of "substance over form" in assessing the quality of capital. This means that the actual risk transfer to the market should be the primary consideration.
• Legal Risk Assessment: CEBS should also evaluate any legal risks embedded in hybrid instruments, particularly those that may be triggered during a crisis.
• Industry Engagement: CEBS is encouraged to engage with industry representatives and credit rating agencies to ensure that the proposed principles are practical and well-informed.
• Timing: The results of CEBS' work are expected to be available by the end of the year, following the EBC's discussions.
• Reporting Requirements: CEBS is required to report on areas where convergence has been achieved and those where it may not have been possible, along with the reasons for such limitations.

Conclusion

The European Commission and EBC are keen to ensure that the prudential goal of improving capital quality is met in a timely and effective manner. By focusing on the qualitative and quantitative aspects of hybrid capital instruments and considering the impact on financial markets, CEBS is expected to play a central role in shaping a unified supervisory approach across the EU. This effort will not only support regulatory consistency but also enhance the resilience of the European banking sector.