On 21 October 2020, the European Banking Authority (EBA) issued an opinion to clarify the prudential treatment of the so-called ‘legacy instruments” in view of the end of the grandfathering period on 31 December 2021. In its opinion, the EBA proposes policy options to address the infection risk when created by such instruments. The EBA’s recommendations aim at ensuring a high quality of capital for EU institutions and a consistent application of rules and practices across the European Union.

When the Capital Requirements Regulation (CRR) entered into force, grandfathering provisions were introduced. In order to ensure that institutions had sufficient time to meet the requirements set out by the new definition of own funds, certain capital instruments that, at that time, did not comply with the new definition of own funds were grandfathered for a transition period with the objective of phasing them out from own funds. The beneficial treatment provided by the CRR grandfathering provisions will come to an end on 31 December 2021.

On 9 September 2019, the EBA announced its intention to clarify the end-treatment of the legacy instruments and called institutions to engage with their respective competent authorities with regard to the magnitude and intended future treatment of their outstanding ‘legacy’ instruments.

The EBA will monitor the situation of legacy instruments until the end of the grandfathering period, and will place particular focus on the use of the proposed policy options across jurisdictions with a view to ensuring a consistent application. In addition, the EBA will consider the transposition of specific provisions of the Bank Recovery and Resolution Directive into national legislation and how this might alleviate concerns about the existence of infection risk linked to subordination aspects.