27 November 2013
The European Banking Authority (EBA) launched today a consultation on Draft Regulatory Technical Standards (RTS) on own funds (Part IV) aimed at setting harmonised criteria for instruments with multiple distributions that would create a disproportionate drag on capital, as well as clarifying the meaning of preferential distributions. These RTS will be part of the Single Rulebook in banking aimed at enhancing regulatory harmonisation in Europe and namely at strengthening the quality of capital. The consultation runs until 24 January 2014.
Instruments with multiple distributions
Capital instruments may include provisions that give rise to distributions that are a multiple of the distributions paid on voting Common Equity Tier 1 (CET1) instruments (multiple distributions) or that are different from those paid on voting CET1 instruments (differentiated distributions). However, only a subset of those instruments would be considered not to create a disproportionate drag on capital, and could therefore be included in CET1.
The draft RTS aim at proposing harmonised criteria which are to be met by those instruments that are to be included in CET1, so as to ensure that the future loss absorbency of CET1 instruments is in no way compromised by disproportionate distributions that would create a drag on capital. In this respect, quantitative limits are proposed. These limits are expressed (i) in terms of the amount of distribution on one non-voting instrument with a multiple dividend compared with the amount of distribution on one voting instrument and (ii) in terms of the total amount of distribution paid on CET1 instruments.
These criteria are devised for joint stock companies (JS) whereas a different approach is also proposed for non-joint stock companies (NJS) in order to take into account their specificities. However, the EBA is investigating further the legal scope of its mandate with reference to the latter institutions.
Instruments with preferential distributions
Preferential distributions exist when holders of CET1 instruments have an advantage compared with other holders of CET1 instruments of the same institution, particularly regarding the timing and order of distribution payments. In addition, also those instruments where the distributions exceed the limits set with respect to multiple distributions are considered as preferential. In clarifying the definition of preferential distributions, these RTS aim at ensuring equal treatment among CET1 holders.
Comments can be sent to the EBA by clicking on the "send your comments" button on the respective consultation pages. Please note that the deadline for the submission of comments is 24 January 2014.
All contributions received will be published following the close of the consultation, unless requested otherwise.
A public hearing for the three consultations will take place at the EBA premises on 16 December 2014 from 14:00 to 17:00 UK time.
The proposed draft RTS have been developed on the basis of Regulation 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR).
The EBA is expected to submit these draft RTS to the European Commission by 1 April 2014.