EBA replies to claims concerning Common Equity Tier 1 classification of UniCredit capital instruments

20 July 2018

The European Banking Authority published today its reply to claims by Caius Capital LLP that the European Central Bank (ECB) has breached Union law by not disqualifying the Common Equity Tier 1 (CET1) classification of Unicredit capital instruments due to arrangements involving a transaction known as Convertible and Subordinated Hybrid Equity-Linked Securities (CASHES). The EBA finds that there is no clear evidence of a breach of Union law by the ECB and therefore decided not to open a formal investigation. 
On 3 May, the EBA received a letter from Caius Capital LLP asking for a formal investigation into whether the ECB and the Bank of Italy breached Union law because of the CET1 classification of capital instruments of Unicredit S.p.A (Unicredit).  The claims made by Caius Capital LLP derive from their interpretation of a transaction known as CASHES and focus largely on conditions for qualification of capital instruments as CET1 instruments under Article 28(1) of the Capital Requirements Regulation (CRR). 
The EBA considered the request of Caius Capital LLP in the context of the exercise of its discretion to open an own-initiative breach of Union law investigation under Article 17 of the EBA's founding Regulation.
As part of the EBA's own funds monitoring role, the EBA on an ongoing basis pursuant to Article 26 and 80 of CRR coordinates reviews of instruments, including those issued prior to CRR.  Competent authorities under their supervisory remit may request the inclusion of specific own fund instruments in this review on the basis of their analysis in the context of their ongoing supervision.  
Taking into account the information gathered during the EBA's preliminary enquiries, the position previously adopted by the EBA in 2012 with respect to the CASHES transaction, and the degree of discretion available to competent authorities in determining their annual supervisory examination programmes, the EBA does not consider that there are clear grounds to believe that the ECB has failed to carry out its supervisory responsibilities in a way which breaches its obligations under Union law.  


The original CASHES transaction took place in 2008 and was followed by a restructuring in 2011 which provided for the capitalisation of the share premium account pertaining to the ordinary shares issued in 2008 as part of the original transaction.  
In 2012, the EBA's Board of Supervisors considered the treatment of the CASHES and particularly the capitalisation of the share premium account in the context of the recapitalisation exercise following the first EBA stress test. On the basis that the capitalisation of the share premium under Italian law had already taken place and was no longer distinguishable from ordinary reserves, that amount was accepted by the Board as Core Tier 1 capital on a one-off basis. This amount was later treated as CET1 under the CRR, while the remaining nominal amount of the instrument itself was treated as Additional Tier 1 (AT1). 

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