2.4.7.4 Special measures for breach of combined buffer requirement

A special measure can be imposed in the situation of violation of the combined buffer requirement. Pursuant to Article 141 CRD IV a bank is prohibited from making a distribution in connection with CET 1 capital to an extent that would decrease its CET 1 capital to a level where the combined buffer requirement is no longer met. A distribution includes a payment of cash dividends.1 If a bank in distress does not meet the combined buffer requirement, it has to calculate the so-called maximum distributable amount (MDA) and notify its competent authority thereof. Before the bank has calculated its MDA, it may not make a distribution in connection with CET 1 capital, create an obligation to pay variable remuneration or discretionary pension benefits or pay variable remuneration – but only, if the obligation to pay was created at a time when the bank failed to meet the combined buffer requirement – or make payments on AT 1 instruments.2 In addition, the bank is prohibited from distributing more than the MDA while it fails to meet or exceed its combined buffer requirement. The MDA trigger moment is illustrated in the below figure.

Source: Melis and Weissenberg 2019, p. 14.

The MDA is calculated by multiplying the sum of interim and year-end profits not included in CET 1 capital minus the amounts which would be payable by tax, if these profits were to be retained. Subsequently, a certain factor has to be applied, which can be 0, 0.2, 0.4 or 0.6, depending on the circumstances. The restrictions only apply to payments that result in a reduction of CET 1 capital or in a reduction of profits, and where a suspension of payment or failure to pay does not constitute an event of default or a condition for the commencement of proceedings under the insolvency regime applicable to the bank.3

Taking into account the above, it is important for the shareholders and holders of AT1 instruments issued by a bank that the bank restores its regulatory capital so that it can meet the combined buffer requirement, as a result of which there are no restrictions in relation to distributions (other than that these payments may not lead to a situation in which the combined buffer requirement is no longer met).