On 7 July 2022, the European Banking Authority (EBA) published an analysis of how its October 2020 opinion on the prudential treatment of legacy instruments has been implemented across the EU.

The EBA opinion noted that when reviewing EU institutions’ legacy instruments and examining the clauses that led to their grandfathering, two main issues created so-called ‘infection risk’ (the risk of other layers of own funds or eligible liabilities instruments being disqualified).The first issue related to the flexibility of distribution payments principle. The second issue involved clauses that might contradict the eligibility criterion of subordination among the different layers of own funds and eligible liabilities.

Overall, the EBA’s analysis finds that the monitoring of the implementation of the opinion shows that significant actions have been put in place to address the infection risk. In general, institutions demonstrated a willingness to clean up their balance sheets and ensure a further strengthened loss absorbency capacity mostly via the termination of legacy instruments. In some cases, this came with an impact on their Common Equity Tier 1.

The EBA also recalls, in its analysis, that the primary objective of the opinion was to address possible challenges in the quality of institutions’ own funds and eligible liabilities posed by the end of the Capital Requirements Regulation grandfathering period. As a result, capital instruments that were grandfathered during the transition period ending December 2021 were under the scope of the EBA’s monitoring exercise. However, the EBA acknowledges that a new generation of legacy instruments has been created by the new grandfathering period running until June 2025 and resulting from the Capital Requirements Regulation 2.  The EBA expects that institutions and Member State competent authorities will apply consistently the guidance and principles of the opinion for identifying potential issues and develop appropriate actions for addressing them. The EBA will re-assess, in due time, the need for additional scrutiny on these actions and on the remaining stock of legacy instruments.