On January 26, 2016, the European Commission published a report on the appropriateness of the definition of “eligible capital” under the CRR. The definition of “eligible capital” is used for defining large exposures, setting large exposure limits, determining the prudential treatment of qualifying holdings outside the financial sector and setting the capital requirements for investment firms with limited investment services.

 “Eligible capital” is the sum of Tier 1 capital and Tier 2 capital. However, the amount of Tier 2 capital that will be recognized as “eligible capital” is restricted, although the restrictions are subject to a transitional period. The definition of “eligible capital” replaced the “own funds” definition from January 1, 2014 and firms were allowed to fully recognize Tier 2 capital as “eligible capital.” From 2015, firms could only recognize Tier 2 capital for up to 75% of the amount of Tier 1 capital they held as “eligible capital,” and in 2016 that will move to 50%. Once fully transitioned, the amount of Tier 2 capital that will be recognized as “eligible capital” cannot exceed one third of Tier 1 capital. The Commission is required under the CRR to report to the European Parliament and the European Council on whether the new definition was appropriate and whether any legislative amendments should be proposed. Based on the opinion of the EBA in February 2015, the Commission has found that to date there have been no particular issues over the appropriateness of the definition of “eligible capital.” However, given that the new definition has been phased in and will only be fully implemented in 2016, the Commission will work with the EBA to continue to monitor the application of new definition.

The Commission’s report is available at: http://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/1-2016-21-EN-F1-1.PDF and the EBA’s Opinion is available at: http://finreg.shearman.com/european-banking-authority-opinion-on-definition-of-eligiblecapital.