The European Banking Authority (EBA) published today an update of its first report on the monitoring of Additional Tier 1 (AT1) capital instruments issued by EU institutions and released on 7th October 2014 . This update is partly based on the review of new AT1 issuances and includes some final conclusions of the EBA on issues previously flagged as being under investigation. The EBA expects to gather further insight on the basis of future issuances.
The EBA has reviewed fifteen AT1 issuances, which took place between August 2013 and November 2014. This report notably illustrates the EBA's views on clauses that it recommends be avoided in the terms and conditions of AT1 instruments.
In particular, this report clarifies the EBA's position on acceptable triggers for regulatory calls and on the conditions for the inclusion of tax gross-up provisions in the terms and conditions of AT1 instruments.
In addition, the report further details the triggers for loss absorption, in particular as concerns the Common Equity Tier 1 (CET1) (on a consolidated, sub-consolidated or individual level) that should be the basis for setting the triggers for AT1 instruments issued within a banking group. Finally, the report elaborates on the rationale for disallowing contingent clauses where payments become mandatory if they lose the status of AT1 instruments.
This report was finalised following a public hearing held on 18 May. The slides presented during the public hearing can be found here.
Legal basis and next steps
In accordance with Article 80 of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR) on the continuing review of quality of own funds, the ‘EBA shall monitor the quality of own funds instruments issued by institutions across the Union'.
The CRR lays down eligibility criteria for AT1 instruments (in particular Articles 51 to 55). Those criteria are supplemented by the Commission Delegated Regulation (EU) No 241/2014 (Regulatory Technical Standards (RTS) on own funds). Several AT1 instruments have now been issued by European institutions in accordance with those criteria.