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Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.4.2.1
2.4.2.1 CET 1 capital
mr. M. Louisse-Read, datum 01-06-2020
- Datum
01-06-2020
- Auteur
mr. M. Louisse-Read
- JCDI
JCDI:ADS213960:1
- Vakgebied(en)
Financieel recht / Europees financieel recht
Staatssteun (V)
Voetnoten
Voetnoten
Article 26(1) CRR.
Article 26(2) CRR. Banks may include interim or year-end profits in CET 1 capital before the bank has taken a formal decision confirming the final profit or loss of the bank for the year only with the prior permission of the competent authority.
Pursuant to Article 4(1)(100) CRR ‘accumulated other comprehensive income’ has the same meaning as under International Accounting Standard (IAS) 1, as applicable under Regulation (EC) No. 1606/2002. IAS 1 contains a definition of ‘other comprehensive income’ in paragraph 7. It can be derived from this definition that the components of other comprehensive income include changes in revaluation surplus, actuarial gains and losses on defined benefit plans, gains and losses aris ing from translating the financial statements of a foreign operation, gains and losses on remeasuring available-for-sale financial assets and the effective portion of gains and losses on hedging instruments in a cash flow hedge.
Articles 32-49 and 79 CRR. Pursuant to Article 79 CRR where a bank holds capital instruments or has granted subordinated loans, as applicable, that qualify as CET 1, AT 1 or Tier 2 instruments in a financial sector entity temporarily and the competent authority deems those holdings to be for the purposes of a financial assistance operation designed to reorganise and save that entity, the competent authority may waive on a temporary basis the provisions on deduction that would otherwise apply to those instruments. See also Articles 73-76, 81-85, 87 and 90 CRR.
Article 26(3) CRR. Joosen 2015, p. 183-184.
EBA, EBA updates on monitoring of CET1 capital instruments, 20 July 2018. The list is available on the website of EBA: https://eba.europa.eu.
Article 483 CRR.
EBA, Single Rulebook Q&A, Question ID 2013_11.
ECB, Decision permitting Dexia Crédit Local S.A. on the basis of the consolidated situation of Dexia S.A. to include in Common Equity Tier 1 the instruments issued as a result of the conversion of the preferred shares into ordinary shares, 27 November 2017.
Article 31 CRR.
CET 1 capital items1 consist of (a) capital instruments, provided the conditions laid down in Article 28 or, where applicable, Article 29 CRR are met; (b) share premium accounts related to the capital instruments referred to in point (a); (c) retained earnings;2 (d) accumulated other comprehensive income;3 (e) other reserves;4 and (f) funds for general banking risk.5 Certain prudential filters and deductions have to be applied to all CET 1 capital items.6 The items referred to in points (c) to (f) are recognised as CET 1 only when they are available to the bank for unrestricted and immediate use to cover risks or losses as soon as these occur.7
Competent authorities have to evaluate whether issuances of CET 1 instruments meet the criteria set out in Article 28 or, where applicable, Article 29 CRR. With respect to issuances after 31 December 2014, banks may classify capital instruments as CET 1 instruments only after permission is granted by the competent authority, which may consult the EBA.8
The EBA has published a list on its website of capital instruments that competent authorities in the Member States have classified as CET 1.9 The list is updated on a regularly basis. Capital instruments that qualify as CET 1 capital are, for example, ordinary shares issued by a bank that has the form of a public or private limited liability company or certificates issued by a bank that has the form of a cooperative society.
By way of derogation, during the period from 1 January 2014 to 31 December 2017, capital instruments that were issued prior to 1 January 2014 within the context of recapitalisation measures pursuant to State aid rules and that were considered compatible with the internal market by the Commission under Article 107 TFEU could also classify as CET 1.10
It can be derived from the sixth update of the CET1 list that was published by the EBA on 17 November 2017, that Austria, Belgium, Germany, Greece, Italy, Portugal and Spain permitted banks to include these instruments in their CET 1. This is no longer possible as of 1 January 2018, unless these instruments are fully eligible to CET 1 in their own right.11 This was the subject of the decision of the ECB dated 27 November 2017 in relation to the request of Dexia Crédit Local S.A. (Dexia) to include in CET 1 the preferred shares held by the Belgian and the French States after conversion thereof in new ‘A shares’ fulfilling the criteria of CET 1 in combination with the issuance of contingent liquidation rights to preserve the economic rights that were attached to the preferred shares so as to satisfy the burden-sharing requirements imposed by the Commission as a condition to the approval of the State aid awarded to Dexia. The ECB considered that the new A shares did not qualify as CET 1 instruments under Article 28 CRR. It however permitted Dexia to include the instruments in CET 1 capital on the basis of Article 31 CRR, as discussed below.12
Article 31 CRR provides that competent authorities may permit banks in emergency situations to include in CET 1 capital instruments that are issued after 1 January 2014 and that are issued within the context of recap italisation measures pursuant to State aid rules, if, inter alia, the capital instruments are fully subscribed, held by the State and are able to absorb losses, there are adequate exit mechanisms for the State and the competent authority has granted its prior permission.13
It can be derived from the updated CET1 list that was published by the EBA on 17 November 2017, that Greece permits banks to include these instruments in their CET 1.