EBA calls for more certainty and consistency in the application of restrictions to profits pay-outs to restore capital adequacy

18 December 2015

The European Banking Authority (EBA) issued today an Opinion on the trigger, calculation and transparency of the Maximum Distributable Amount (MDA). The Opinion clarifies that the MDA should be calculated taking into account both minimum (Pillar 1) and additional (Pillar 2) capital requirements which should be met at all times, as well as the combined buffer requirement. The Opinion is designed to support the consistent application of distribution restrictions laid down in the Capital Requirements Directive (CRD) in order to promote a level playing field across the Single Market, and to give greater certainty for banks' capital planning needs. It also calls for transparency in Pillar 2 outcomes for all banks, with a view to providing clarity for investors in banks. The Opinion advises the European Commission to review the CRD text in the future to ensure certainty and more consistency.

In announcing the Opinion, Andrea Enria, Chairman of the EBA, said: "Consistency in supervisory outcomes is a cornerstone of the Single Market. Clarity about the implications of supervisory decisions is similarly vital for banks undertaking capital planning and for investors in banks. The EBA's Opinion today provides both clarity and consistency in the mechanisms for the trigger and calculation of MDA across the EU".
The Opinion clarifies the agreed stacking order of capital requirements, with Pillar 1 and Pillar 2 sitting at all times beneath the combined buffer. This view is supported by CRD Articles on the conditions for authorisation withdrawal, supervisory powers, and on capital buffers and is based on the clarification already provided on the stacking order of capital requirements by the EBA SREP Guidelines.
Accordingly, the EBA Opinion re-affirms the consistency of the MDA trigger and calculation with the stacking order of capital requirements entrenched in the CRD and further clarified by the EBA SREP guidelines. The EBA also advises competent authorities to assess how any proposed MDA allocation between dividends, share buy backs, payments on Additional Tier 1 (AT1) instruments and of variable remuneration would support timely capital restoration plans while not endangering institutions' funding continuity. When necessary, competent authorities are advised to use their broader supervisory powers and impose measures ensuring more consistency with such objectives.
Cognisant that the supervisory focus is moving from bail outs to bail ins, the Opinion notes the importance of MDA triggers to investors in banks' instruments such as AT1 and, consequently, of the disclosure of additional own funds imposed under the SREP.
On disclosure, Enria added: "the push for increased transparency reflects our belief that if investors are to bear the costs of bank failures, they need to have access to all relevant information".
Finally, the EBA acknowledges that Article 141 should be reviewed by the European Commission with a view to avoid different interpretations, ensure consistency with the stacking order of capital requirements and to enable limited supervisory flexibility regarding distributions.

Note to the editors

  1. Pursuant to Article 141 of the CRD, upon breaching the combined buffer requirement (defined by Article 128(6) of CRD), banks face distribution restrictions in relation to common equity capital, AT1 instruments and variable remuneration, as determined by the Maximum Distributable Amount (MDA) framework. These restrictions have the objective of capital restoration when capital buffers are breached, in contrast with the minimum requirements under Pillar 1 and Pillar 2 capital, which are to be met at all times.
  2. The Maximum Distributable Amount (MDA) is the amount of profits payable to shareholders, AT1 investors and employees not to be exceeded in order to restore capital buffers 
  3. The combined buffer requirement is the sum of the capital conservation buffer and any of the other applicable capital buffer requirements envisaged by the CRD (i.e. counter cyclical buffer, systemic risk buffer, G-SII/O-SII buffer). It is an additional layer of capital which banks needs to hold to counter systemic, macroprudential and other risks not covered by idiosyncratic (Pillar 1) and (Pillar 2) minimum capital requirements which sit below the combined buffer. By definition, in principle the breach of the combined buffer requirement does not prompt intrusive or resolution type supervisory measures, as can be expected in the case of the breach of Pillar 1 and/or Pillar 2. However, the breach of the combined buffer should be only temporary and banks need to implement a capital restoration plan to take capital levels above this requirement. The automatism of distribution restriction envisaged by Article 141 of CRD is intended to be a minimum common measure applicable to all banks authorised in any Member State of the European Union.



Press contacts:

Franca Rosa Congiu

E-mail: press@eba.europa.eu - Tel: +44 (0) 207 382 1772