Where permitted under national law, direct contributions to reserves may be recognised as CET1, as long as they meet the requirements of the last subparagraph of Article 26(1) of Regulation (EU) No 575/2013 (CRR), namely that they are available to the institution for unrestricted and immediate use to cover risks or losses as soon as these occur. 

The use of direct contributions to reserves should be approached prudently, as it is not meant to be the primary method to raise capital. The potential use of such measure is expected to be subject to similar conditions, as listed under the paragraph below, to those of CET1 instruments, and under the same level of competent authority scrutiny. 

In this regard, when assessing the conformity of those contributions with the criteria contained in the last subparagraph of Article 26(1) CRR, competent authorities should take into account the following criteria, which can be adapted by taking into account the specificities of each case and the applicable national legislation:

a) The contribution should be made to offset losses or as an explicit equity contribution. 

b) It should be made as a non-refundable contribution.

c) If there are several shareholders, it is generally expected that all make contributions in proportion to their share in the capital of the institution. Exceptions should be scrutinised and duly justified. There should not be any agreement according to which a disproportionate contribution leads to a preferential treatment in case the reserve is dissolved.

d) The contribution should be evidenced as fully paid up at the time of its realisation, under the same conditions as share capital, and the contribution should not be funded directly or indirectly by the institution. Contributions in kind should fulfil the criteria specified in Q&A 3636.

e) There should not be any direct or indirect economic benefits of any kind to the contributor or any other person for the contribution made (e.g. dividends, interest, remuneration, servicing cost, etc).

f) The provisions governing or documentation formalising the contribution should indicate expressly that, in accordance with the last subparagraph of Article 26(1) CRR, the amounts contributed are available to the institution for unrestricted and immediate use to cover risks or losses as soon as these occur. 

g) Contributions should be classified as equity for the purposes of determining balance sheet insolvency, where applicable under national insolvency law.

h) Contributions should be accounted for as reserves within equity, in accordance with the applicable accounting framework.

i) The institution should provide sufficient disclosure of such an item in its public accounts.

j) The contributor should not be entitled to any right on the profits and reserves in any situation including in the event of the institution’s insolvency or liquidation.

k) All the above requirements should be documented in a legal form similar to the one used for increases of CET1 instruments taking into account the local legal framework. For contributions in kind, similar documentation can also include an independent auditor’s valuation.

l) Any reclassification of the contribution to another reserve and/or distribution should be subject to prior consultation with the competent authority.