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Single Rulebook Q&A

Question ID: 2018_4417
Legal act : Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 – CRR2
Topic : Own funds
Article: Article 52, Article 63
Paragraph:
Subparagraph:
COM Delegated or Implementing Acts/RTS/ITS/GLs: Regulation (EU) No 183/2014 - RTS for the calculation of specific and general credit risk adjustments
Article/Paragraph : //
Type of submitter: Competent authority
Subject matter : Reclassification of own funds instruments from a grandfathered category to a fully eligible category and purpose of grandfathering provisions
Question:

Is it permissible for an institution, and if so under which circumstances and/or criteria, to reclassify own funds instruments from a grandfathered category to a fully eligible category in particular in a context where no change in the relevant applicable laws or terms and conditions of the reclassified instruments has taken place before the reclassification? Would the answer be the same for a reclassification of own funds instruments from a disqualified category to a fully eligible category?

Background on the question:

In the light of a reclassification by an institution of own funds instruments (Tier 2 instruments in this case) from a grandfathered category to a fully eligible category, it is important to have clarity on the permissibility and the applicable conditions for this type of reclassification for the benefit of a wider range of EU institutions.

Date of submission: 11/12/2018
Published as Final Q&A: 21/12/2018
EBA answer:
Reclassifications of own funds instruments as described, i.e. from a grandfathered category to a fully eligible category, although unusual, are not prohibited as such by Regulation (EU) No 575/2013 (CRR).
 
As explained in the introductory recitals of the CRR (recitals 78 and 119 in particular), the general purpose of the grandfathering provisions as they relate to own funds is to ensure an appropriate continuity in the level of own funds, while also ensuring that institutions have sufficient time to meet the new required levels and definitions of own funds and that certain capital instruments that do not comply with the definition of own funds laid down in the CRR are phased out. To the extent that grandfathering allows for deviations from the new criteria on the quality of own funds instruments those deviations should be limited to the largest extent possible. The possibility for institutions to benefit from a grandfathered treatment should therefore be subject to strict conditions.
 
In cases where institutions intend to conduct such reclassifications, very close scrutiny should be exercised by the competent authority of the reasons for such a reclassification, in particular in contexts where:
 
- no change in the relevant applicable laws, or terms and conditions of the instruments has taken place prior to the reclassification,
- the reclassification has a significant impact on the capital ratios,
- any forthcoming changes to the CRR and related new grandfathering provisions in relation to eligibility criteria of own funds instruments are likely to come into force.
 
Competent authorities are expecting to be notified in advance of any such proposed reclassifications.
 
The assessment in substance of the eligibility of the instruments elected for reclassification should be the same as that applicable to every new issuance (being AT1 or Tier 2). As such, institutions should consider the terms and conditions of the relevant instruments at issuance. These terms and conditions need to be assessed against the rules which are applicable at the moment of the reclassification of the instrument. These rules encompass the relevant regulatory provisions stemming from Part Two (Own funds) and Part Ten, Title I (Transitional Provisions) of the CRR (legislative act) and Regulatory and Implementing Technical Standards (delegated and implementing acts), as supplemented by related guidance for the consistent and effective application of the regulatory framework provided via EBA Q&As or reports (currently the most recent available version of the EBA AT1 monitoring report) available at the time of reclassification.
 
The above answer only applies in cases where an institution has elected to change the prudential treatment previously adopted for an instrument, with the consequence that the instrument would be cascaded ‘up’ and treated as fully eligible in the same tier/a higher tier of capital whereas it was previously grandfathered (e.g. grandfathered Tier 2 reclassified to fully eligible Tier 2).
 
The same principles apply by analogy to cases where own funds instruments would be reclassified from a disqualified category (i.e. instruments not eligible anymore as own funds instruments) to a fully eligible category.
Status: Final Q&A
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