- Question ID
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2016_2552
- Legal act
- Directive 2013/36/EU (CRD)
- Topic
- Other issues
- Article
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104a, 128
- Paragraph
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4
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Article/Paragraph
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n.a.
- Type of submitter
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Credit institution
- Subject matter
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Interaction of the EBA Opinion on the MDA and Article 92 Regulation (EU) No 575/2013 (CRR)
- Question
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Where a bank does not have sufficient subordinated debt in issue to fulfil its minimum 1.5% Tier 1 and 2.0% Tier 2 requirement, it may need to use a higher quality form of capital to fulfil these requirements.
To the extent a bank has to assign CET1 to fulfil shortfalls in its minimum Tier 1 and Tier 2 requirements, can this CET1 also be applied to meet Pillar 2 and Combined Buffer requirements for the purpose of calculating the MDA?
- Background on the question
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The 'Opinion of the European Banking Authority on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions' raises questions as to how the Pillar 1, Pillar 2 and buffers requirements interact with Article 92 CRR.
Taking an example, a bank has a 9.5% CET 1 SREP requirement. This breaks down into a 4.5% minimum CET1, 2.5% Pillar 2 requirement and 2.5% Capital Conservation Buffer. If the bank had a reported CET1 of 11.0% but only had 0.50% of AT1 and 0.5% of Tier 2. How is the starting point of the MDA calculated?
Is the headroom to the MDA 150bp, i.e. 11.0% reported CET1 less 9.5%, or is the bank already subject to the MDA since the shortfall of AT1 and T2 instruments to meet Pillar 1 requirements (i.e. 2.5%) has to be covered with CET1 which raises the CET1 requirements to 12% with a consequent CET1 shortfall of 1%. This would be because CET1 cannot be double counted i.e. used to meet AT1 and Tier 2 needs and also applied against the combined buffer or Pillar 2 requirements. - Submission date
- Final publishing date
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- Final answer
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Revised answer:
Double counting of capital in the same capital stack is not allowed. In accordance with Article 104a(4) of Directive 2013/36/EU (CRD), the institution should meet the additional own funds requirement imposed by the competent authority (Pillar 2 requirement P2R) with own funds that satisfy the following conditions:a) at least three quarters of the additional own funds requirement (P2R) shall be met with Tier 1 capital;
b) at least three quarters of the Tier 1 capital referred to in point a) shall be composed of CET1 capital.
By way of derogation from the above, the competent authority may require the institution to meet its additional own funds requirement with a higher portion of Tier 1 capital or Common Equity Tier 1 capital, where necessary, and having regard to the specific circumstances of the institution.
With regard to Pillar 2 Guidance, own funds that are used to meet the guidance on additional own funds communicated in accordance with paragraph 3 of Article 104b CRD to address risks other than the risk of excessive leverage shall not be used to meet any of the following:
a) the own funds requirements set out in points (a), (b) and (c) of Article 92(1) of Regulation (EU) No 575/2013 (CRR);
b) the requirement laid down in Article 104a of CRD imposed by competent authorities to address risks other than the risk of excessive leverage and the combined buffer requirement.
Moreover, own funds that are used to meet the guidance on additional own funds communicated in accordance with paragraph 3 of Article 104(b) CRD to address the risk of excessive leverage shall not be used to meet the own funds requirement set out in point (d) of Article 92(1) of Regulation (EU) No 575/2013 (CRR), the requirement laid down in Article 104a of CRD imposed by competent authorities to address risk of excessive leverage and the leverage ratio buffer requirement referred to in Article 92(1a) of Regulation (EU) No 575/2013 (CRR).
According to Article 128(9) CRD institutions shall not use Common Equity Tier 1 capital that is maintained to meet the combined buffer requirement referred to in Article 128(6) CRD, to meet any of the requirements set out in points (a), (b) and (c) of Article 92(1) of Regulation (EU) No 575/2013 (CRR), the additional own funds requirements imposed pursuant to Article 104a of CRD to address risks other than the risk of excessive leverage, and the guidance communicated in accordance with Article 104b(3) of CRD to address risks other than the risk of excessive leverage. Institutions shall not use CET1 capital that is maintained to meet one of the elements of its combined buffer requirement to meet the other applicable elements of its combined buffer requirement. Institutions shall not use CET1 capital that is maintained to meet the combined buffer requirement referred to in Article 128(6) CRD to meet the risk-based components of the requirements set out in Articles 92a and 92b of Regulation (EU) No 575/2013 (CRR) and in Articles 45c and 45d of Directive 2014/59/EU (BRRD).
Moreover, it should be noted that CET1 capital must be first used to meet the minimum own funds requirements (including 6% Tier 1 and 8% total own funds requirements in case of any AT1 or Tier 2 shortfall), before the remaining CET1 capital can contribute to meet the additional own funds CET1 requirements and then the combined buffer requirements (in accordance with the stacking order of own fund requirements).
Therefore, the example provided in the question suggests that the overall capital requirement for an institution is 13% of total own funds (8% minimum own funds + 2.5% additional own funds +2.5% combined buffer requirement) and 9.5% of CET1 (4.5% minimum of funds + 2.5% additional own funds + 2.5% combined buffer requirement) as both additional own funds and the combined buffer requirement have to be met by CET1 as per the example. In case an institution has a shortfall of AT1 or Tier 2 capital to meet its total own funds requirements, this shortfall should be covered by CET1 capital. When CET1 capital after covering for these shortfalls is not sufficient to meet the overall capital requirement, the MDA calculation should apply.
Previous answer:As clarified in the EBA Opinion on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions (EBA/Op/2015/24) the stacking order of own funds requirements to be considered for the purposes of determining the trigger for MDA restrictions and MDA calculation in accordance with Article 141 of Directive EU/2013/36 (CRD) is:(1) minimum own funds requirements set in accordance with Article 92 of Regulation (EU) No 575/2013 (CRR);(2) additional own funds requirements set in accordance with Article 104(1)(a) of CRD based on the outcomes of supervisory review and evaluation process (SREP) carried out in accordance with Article 97 of CRD and EBA Guidelines on common procedures and methodologies for SREP (EBA/GL/2013/36, SREP Guidelines), and(3) combined buffer requirements set in accordance with Chapter 4 of Title VII of CRD.The SREP Guidelines state that competent authorities should determine and communicate to an institution its Total SREP Capital Requirement (TSCR), which is determined as the sum of minimum own funds requirements (i.e. 8% if total risk exposure amount) and additional own funds requirements imposed as the outcome of SREP and expressed in TREA. The determination of the absolute amount of TSCR is not affected by the decision of a competent authority on the composition of own funds needed to meet the additional own funds requirements, and therefore should be articulated in terms of all elements forming the minimum own funds requirements (i.e. 8% total own funds, 6% Tier 1 and 4.5% CET1), even in the case when the competent authority determines that additional own funds requirements should be met only by CET1, that is also in line with SREP Guidelines.Moreover, it should be noted that CET1 instruments must be first used to meet the minimum own funds requirements (including 6% Tier 1 and 8% total own funds requirements in case of any AT1 or Tier 2 shortfall), before the remaining CET1 can contribute to meet the additional own funds CET1 requirements and the combined buffer requirements (in accordance with the stacking order of own fund requirements).Therefore, the example provided in the question suggests that the overall capital requirement for an institution is 13% of total own funds (8% minimum own funds + 2.5% additional own funds +2.5% combined buffer requirement) and 9.5% of CET1 (4.5% minimum of funds + 2.5% additional own funds + 2.5% combined buffer requirement) as both additional own funds and the combined buffer requirement have to be met by CET1 as per the example. Since in case an institution has a shortfall of AT1 or Tier 2 instruments to meet its total own funds requirements this shortfall should be covered by CET1 instruments both the requirements would act as trigger for calculating the MDA in accordance to the EBA Opinion on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions.In the example provided in the question, the banks' actual own funds are 11% CET1 and 12% total own funds, that are not sufficient to meet the overall capital requirement of 13% and therefore MDA calculation applies. - Status
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Final Q&A
- Answer prepared by
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Answer prepared by the EBA.
- Note to Q&A
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Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Directive 2013/36/EU (CRD).
Disclaimer
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