On 27 June 2024, the European Banking Authority (EBA) published an updated report on the monitoring of Additional Tier 1 (AT1), Tier 2 and total loss absorbing capacity (TLAC) as well as the minimum requirement for own funds and eligible liabilities (MREL) instruments of EU institutions.

The updated report is issued pursuant to Article 80 of the Capital Requirements Regulation which provides that ‘the EBA shall monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union and shall notify the European Commission immediately where there is significant evidence that those instruments do not meet the respective eligibility criteria set out in this Regulation’.

The report follows the 2023 update with a number of amendments including that the EBA clarifies that the prudential valuation of capital instruments should reflect their actual loss absorbency capacity, meaning that such instruments should be measured on the basis of the amount of Common Equity Tier 1 (CET1) capital that would be generated in the event of a write-down or conversion, being the carrying amount with no adjustment. The report also:

  • Addresses the approaches followed by some institutions to reflect from a prudential perspective FX effects on AT1 instruments classified as equity and stresses the need to ensure a consistent application over time when these approaches are used.
  • Specifies the conditions under which different loss absorbency mechanisms (conversion and write-down) and trigger levels can operate simultaneously within the same institution, with the need in particular to fully adhere to the EBA existing guidance and AT1 standardised templates.
  • Covers other aspects including clarifications and recommendations on the redemption of own funds and eligible liabilities instruments, on early redemption clauses, and on the need to include contractual bail-in recognition clauses in own funds instruments issued under English law.

Finally, the report specifically reviews environmental, social and governance capital bonds (i.e., bonds issued for own funds or eligible liabilities purposes), in continuation of the preliminary observations originally published in the previous TLAC/MREL and AT1 monitoring reports. This guidance is valid with no distinction between any type of loss-absorbing regulatory instruments.