Article 80 of the Capital Requirements Regulation (CRR) mandates the European Banking Authority (EBA) to monitor the quality of own funds instruments issued by institutions across the Union and to notify the European Commission immediately where there is significant evidence of those instruments not meeting the criteria set out in Article 28, or where applicable, in Article 29 of the CRR.

The EBA has now published an opinion addressed to the European Commission (Commission), the European Parliament and the Council of the EU on own funds in the context of the CRR review. The opinion includes the EBA’s views on a possible reinforcement of the EBA’s role in terms of Common Equity Tier 1 (CET1) instruments and a desirable clarification of the evaluation/permission provided by Member State competent authorities under Article 26(3) of the CRR. The opinion also elaborates on restrictions on distributions with regard to the maximum distributable amount (MDA) and its definition, as well as on reduction and repurchase of capital instruments, the introduction of an anti-circumvention principle and the introduction of a point of non-viability criterion.

In terms of proposals, the EBA sets out views on aspects of the proposals for the CRR II and Capital Requirements Directive (CRD V) relating to:

  • the role of the EBA in relation to CET1 instruments. The EBA proposes amendments to Article 26 of the CRR intended to reinforce its role in evaluating whether issuances of CET1 instruments meet the criteria specified in the CRR. The EBA also calls for clarification on whether the inclusion of a type of CET1 instrument in the EBA’s list of CET1 instruments is sufficient for an institution to be able to classify subsequent issuances of the same type of instruments as CET1;
  • restrictions on distributions and definition of the MDA. The EBA provides comments on the Commission’s proposed amendments to Article 141 of the CRD IV Directive (CRD IV). It also suggests amendments to the definition of “profits” as used in the definition of the MDA to address a potential misalignment between the CRD IV and Basel III definitions of profits;
  • reduction, redemption, repurchase of capital instruments. The EBA provides comments on the Commission’s proposed amendments to Article 78 of the CRR, which relates to supervisory permission for reducing own funds;
  • anti-circumvention principle. The EBA proposes that a new Article 79(a) should be inserted into the CRR stating that covenants, arrangements and side agreements that sit outside an instrument should be carefully assessed in conjunction with the main terms of the issuance when determining the eligibility of an instrument as CET1; and
  • point of non-viability (PONV). The EBA considers the proposed inclusion of the PONV in the eligibility criteria set out Articles 52 and 63 of the CRR. It recommends the addition of a grandfathering clause added to clarify the eligibility of existing capital issuances.

On the same date the EBA published its fifth updated list of capital instruments that Member State competent authorities have classified as CET1. The list is for the first time accompanied by a report, which includes additional information on the underlying objectives of the monitoring update as well as on the consequences of including or excluding instruments in or from the list.

View EBA opinion on CRR II and CRD V proposals on own funds, 23 May 2017

View EBA updates on monitoring of CET1 instruments, 23 May 2017