According to Article 28(1)( b) CRR capital instruments shall qualify as Common Equity Tier 1 instruments only if […] “the instruments are paid up and their purchase is not funded directly or indirectly by the institution”.
The question whether contributions in kind may be qualified as “payment” (“paid-up”-instruments) referring to Article 28(1)( b) CRR arises if a bank accepts other assets than cash (e.g. equity, bonds, commodities, etc.) as payment by the investor when issuing capital-instruments.
Example: Instead of “cash” the investor and the issuing bank agree on payment in “non-financial sector-shares” considering the respective market value etc. The provisions in CRR do neither provide a definition of “paid-up” nor provide other guidance how to handle the first case in Article 28(1)(b) CRR. Taking into mind the Basel-Accord “payment of cash to the issuing bank is not always applicable, for example, when a bank issues shares as payment for the take‐over of another company the shares would still be considered to be paid‐in” (BCBS FAQ). However, the regulatory framework is not clear on this issue. Also from a prudential point of view only cash should be accepted as payment: Other assets bear inherent risks by nature, e.g. credit-, liquidity- or market risks which can directly jeopardize the intrinsic value of the investment, notwithstanding the factual business-activity by the issuing bank.
Competent authorities have to assess ex-ante and on a case-by-case basis, if an instrument which has not been paid-up with cash may be included in regulatory capital (Articles 28, 52, 63 CRR). In some cases, payment of cash to the bank issuing the instruments is not applicable, for instance when a bank issues shares to pay for the acquisition of another bank.
Paid-up capital should (i) be irrevocable; (ii) be reliably valued; (iii) be fully under the bank’s control; (iv) not expose the bank, directly or indirectly, to the credit risk of the investor.