The European Banking Authority (“EBA”) Announcement and Mandate

The European Banking Authority (“EBA”) announced on 9 September 2019 its intention to provide clarity by mid-2020 on the appropriate treatment of the so-called ‘legacy instruments' under EU Regulation 575/2013 (the Capital Requirements Regulation, “CRR”). The aim of the clarification, according to the EBA’s announcement, is to preserve a high quality capital base for EU institutions under the CRR and a consistent application of rules and practices.

This is consistent with the EBA’s mandate. Pursuant to Article 80 of the CRR (as amended by Regulation (EU) 2019/876), the EBA shall ‘monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union and shall notify the Commission immediately where there is significant evidence that those instruments do not meet the respective eligibility criteria set out in this Regulation'. Pursuant to Article 80, the EBA has been monitoring the quality of Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) issuances in the EU since 2013 and has published monitoring reports.

Grandfathering Under the CRR

When the CRR entered into force, grandfathering provisions were introduced to ensure that institutions had sufficient time to meet the requirements set out by the new definition of ‘own funds’. Certain capital instruments that did not comply with the new definition were grandfathered for a transition period, with the objective of phasing them out from own funds.

Article 484 of the CRR defines the eligibility for grandfathering of items that qualified as own funds under national transposition measures for Directive 2006/48/EC (the Capital Requirements Directive). Article 486 of the CRR specifies the limits for the grandfathering of items within Common Equity Tier 1, Additional Tier 1 and Tier 2 items until 31 December 2021.

The benefits of the grandfathering period will therefore expire at the end of 2021. The early communication on the end-treatment of the ‘legacy' grandfathered instruments by mid-2020 is intended to allow institutions to adequately prepare for the end of the grandfathering period.

Scope of EBA Activities

The EBA states that it will ensure an appropriate interaction with all concerned stakeholders. In the meantime, institutions are encouraged to engage with their respective competent authorities with regard to the magnitude and intended future treatment of their outstanding ‘legacy' instruments in the context of the supervisory dialogue on their capital planning.

The EBA intends to also clarify the interaction with the new grandfathering provisions introduced by the recent EU Banking Package that we have previously written about, and the corresponding amendments to the CRR and the Bank Recovery and Resolution Directive, where relevant for own funds instruments and eligible liabilities.