Regulatory Technical Standards (RTS) on Own Funds

Status: Adopted and published in the Official Journal

These Regulatory Technical Standards (RTS) gather a number of mandates given to the EBA by the Capital Requirements Regulation (CRR) in relation to own funds. These RTS include provisions regarding: technical aspects in relation to Common Equity Tier 1, Additional Tier 1, deductions from Common Equity Tier 1 and from own funds in general, as well as transitional provisions on grandfathering; the treatment of gains on sale associated with future margin income in a securitisation context; the conditions under which competent authorities may determine that a type of undertaking is recognised under applicable national law as a mutual, cooperative society, savings institution or similar institution; the criteria to define broad market indices, the calculation of minority interest and the deduction of indirect and synthetic holdings.

*The RTS on Own Funds (Part 4) were submitted to the European Commission on 27 March 2014.

Consultation on draft technical standards on own funds - Part IV (EBA/CP/2013/43)

Summary
27/11/2013

The European Banking Authority (EBA) launched today a consultation on Draft Regulatory Technical Standards (RTS) on own funds (Part IV) aimed at setting harmonised criteria for instruments with multiple distributions that would create a disproportionate drag on capital, as well as clarifying the meaning of preferential distributions. These RTS will be part of the Single Rulebook in banking aimed at enhancing regulatory harmonisation in Europe and namely at strengthening the quality of capital. The consultation runs until 24 January 2014.

Instruments with multiple distributions

Capital instruments may include provisions that give rise to distributions that are a multiple of the distributions paid on voting Common Equity Tier 1 (CET1) instruments (multiple distributions) or that are different from those paid on voting CET1 instruments (differentiated distributions). However, only a subset of those instruments would be considered not to create a disproportionate drag on capital, and could therefore be included in CET1.

The draft RTS aim at proposing harmonised criteria which are to be met by those instruments that are to be included in CET1, so as to ensure that the future loss absorbency of CET1 instruments is in no way compromised by disproportionate distributions that would create a drag on capital. In this respect, quantitative limits are proposed. These limits are expressed (i) in terms of the amount of distribution on one non-voting instrument with a multiple dividend compared with the amount of distribution on one voting instrument and (ii) in terms of the total amount of distribution paid on CET1 instruments.

These criteria are devised for joint stock companies (JS) whereas a different approach is also proposed for non-joint stock companies (NJS) in order to take into account their specificities. However, the EBA is investigating further the legal scope of its mandate with reference to the latter institutions.

Instruments with preferential distributions

Preferential distributions exist when holders of CET1 instruments have an advantage compared with other holders of CET1 instruments of the same institution, particularly regarding the timing and order of distribution payments. In addition, also those instruments where the distributions exceed the limits set with respect to multiple distributions are considered as preferential. In clarifying the definition of preferential distributions, these RTS aim at ensuring equal treatment among CET1 holders.

Consultation process

Comments can be sent to the EBA by clicking on the "send your comments" button on the respective consultation pages. Please note that the deadline for the submission of comments is 24 January 2014.

All contributions received will be published following the close of the consultation, unless requested otherwise.

A public hearing for the three consultations will take place at the EBA premises on 16 December 2013 from 14:00 to 17:00 UK time.

Background

The proposed draft RTS have been developed on the basis of Regulation 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR).

The EBA is expected to submit these draft RTS to the European Commission by 1 April 2014.

Consultation on Technical Standards for Own funds – Part III (EBA/CP/2013/17)

Summary
23/05/2013

The European Banking Authority (EBA) launches today a consultation on Draft Regulatory Technical Standards (RTS) on own funds (Part III) related to criteria to define broad market indices, the calculation of minority interest and the deduction of indirect and synthetic holdings. The consultation runs until 18 July 2013.

In particular, the objectives of the draft RTS are:

  • Deduction of indirect and synthetic holdings: achieve greater harmonisation as well as increased conservatism in the way the deductions of investments in financial sector entities as well as own capital instruments are applied;
  • broad market indices: put forward criteria for broad market indices so as to avoid that the interest rate/dividend paid by institutions on floating rate capital instruments increase when the credit standing of the institution decreases (credit sensitive dividend features);
  • minority interest: Harmonise the calculation of minority interests to be included in regulatory capital

The proposed RTS complement the draft RTS on own funds already published for consultation on 4 April 2012 (Part I) and 9 November 2012 (Part II). They stem from additional mandates granted to the EBA in the final compromise of the Capital Requirements Regulation.

These RTS will be part of the single rulebook aimed at enhancing regulatory harmonisation in Europe and namely at strengthening the quality of capital.

Consultation on draft Regulatory Technical Standards (RTS) on Own Funds (EBA/CP/2012/11)

Summary
09/11/2012

The proposed draft regulatory technical standards (RTS) on own funds (Part Two) intend to specify the conditions under which competent authorities may determine that a type of undertaking is recognised under applicable national law as a mutual, cooperative society, savings institution or similar institution. The consultation runs until 21 December 2012.

In line with the mandate given to the EBA under the Capital Requirements Regulation (CRR), the draft RTS focus on elements which are of relevance to own funds (features linked to capital instruments, reserves, etc) and may lead competent authorities to recognise a type of undertaking as a mutual, cooperative society, savings institution or similar institution.

These RTS complement the consultation on draft RTS on own funds (Part One) published by the EBA on 4 April 2012 and need to be read in conjunction with it. Namely, the first consultation included details of the rules on own funds to be applied to the European cooperative banking sector (including mutuals, cooperative societies, savings institutions or similar institutions), taking into account its specificities.

The objective of these RTS is also to mitigate the risk that any institution could operate under the specific status of mutual, cooperative society, savings institution or similar institution to which specific own funds requirements may apply, while not possessing features which are common to the European cooperative banking sector.

As already announced by the EBA, all RTS related to own funds requirements are intended to be put forward as one integrated draft Regulation. These RTS will be part of the single rulebook aimed at enhancing regulatory harmonisation in Europe and namely at strengthening the quality of capital. 

Consultation process

Comments on this paper can be sent to the EBA by e-mail to EBA-CP-2012-11@eba.europa.eu by 21 December 2012, indicating the reference EBA/CP/2012/11.

All contributions received will be published, unless requested otherwise.

A public hearing will take place at the EBA premises on 26 November 2012 from 13:00 to 15:00 GMT. To register for the public hearing, click here.

Consultation CP07 on draft Regulatory Technical Standards (RTS) on Own Funds (EBA/CP/2012/07)

Summary
12/06/2012

The European Banking Authority (EBA) launched today a consultation on Draft Regulatory Technical Standards (RTS) on the concept of Gain on Sale associated with future margin income in a securitisation context. These RTS will be part of the single rulebook aimed at enhancing regulatory harmonisation in Europe. The consultation runs until 12 August 2012. A public hearing will take place on 28 June.

The objective of these draft RTS is to specify further the concept and the treatment of a gain on sale, meaning any increase (or part of the increase) in equity under the applicable accounting standard arising from future margin income in the context of a securitisation transaction.

The draft Capital Requirements Regulation (CRR), article 29, establishes, as a general principle, that institutions shall exclude from their own funds increases in equity resulting from the sale of the assets being transferred in a securitisation transaction. This includes increases associated with future margin income that result in a gain on sale for an institution. This principle was already included in the Directive 2006/48, the so called CRD II.

The concept of gain on sale is mainly relevant for financial institutions using the US GAAP as accounting standard.


Next steps

The proposed consultation paper is based on the draft Capital Requirements Regulation (CRR) as proposed by the European Commission on 20 July 2011. As the text is still being discussed by the EU legislator (European Parliament and Council), the proposed RTS may be amended after the consultation to take into account the final CRR text.

These RTS, together with all the standards related to own funds requirements, have to be submitted to the EU Commission by 1 January 2013.

Separate consultations on some remaining RTS on Own Funds will follow in the second half of 2012.

Consultation CP02 on Draft Regulatory Technical Standards (RTS) on Own Funds (EBA/CP/2012/02)

Summary
04/04/2012

The European Banking Authority (EBA) launches today a consultation on Draft Regulatory Technical Standards (RTS) on own funds (Part one). This consultation groups fourteen RTS covering, among others, areas such as Common Equity Tier 1, Additional Tier 1, deductions from Common Equity Tier 1 and from own funds in general and transitional provisions on grandfathering. These RTS will be part of the single rulebook aimed at enhancing regulatory harmonisation in Europe and namely at strengthening the quality of capital. The consultation runs until 04th July 2012.

Main features of the RTS

These technical standards cover all areas of own funds, from features for instrument of the highest quality (CET1 instruments) to instruments of a lower quality (Tier 2 instruments).

Various provisions of the RTS will contribute to increasing the permanence of capital instruments as well as the loss absorbency features of hybrid instruments.

The requirements contained in the draft RTS are mainly directed at institutions, although some of them are directed at competent authorities.

The RTS cover, in particular, the following areas:

  • Common Equity Tier 1 capital, in particular foreseeable charges or dividends, features of capital instruments of mutuals, cooperative societies or similar institutions, applicable forms and nature of indirect funding of capital instruments, limitations on redemption of own funds instruments;
  • Additional Tier 1 capital, in particular the form and nature of incentives to redeem, the conversion or write-down of the principal amount, the use of special purpose entities;
  • Deductions from Common Equity Tier 1 capital and from own funds in general including deductions of capital instruments of financial institutions and insurance/reinsurance undertakings, losses of the current financial year, deferred tax assets, defined benefits pension fund assets, foreseeable tax charges;
  • General requirements like indirect holdings arising from index holdings, supervisory consent for reducing own funds;
  • Transitional provisions for own funds in terms of grandfathering.


Next steps

The proposed consultation paper is based on the draft Capital Requirements Regulation (CRR) as proposed by the European Commission on 20th July 2011. As the text is still being discussed by the EU legislator (European Parliament and Council), some of the mandates for the EBA to develop Binding Technical Standards (BTS) may be modified, added or deleted in the adopted Regulation. Therefore, the proposed RTS will be amended after the consultation to take into account the final CRR text.

All the RTS included in this consultation have to be submitted to the EU Commission by 1 January 2013.

Separate consultations on some remaining RTS on Own Funds will follow in the second half of 2012.

Background

The CRR/CRD IV proposals (the so-called Capital Requirements Regulation - ‘CRR’- and the so-called Capital Requirements Directive – ‘CRD’) set out prudential requirements which are expected to be applicable as of 1 January 2013. The CRR proposals related to own funds translate the proposals from the Basel Committee on Banking Supervision into EU law. Both reforms raise both the quality and quantity of the regulatory capital base.

Notes

This consultation paper puts forward draft RTS related to the following Articles of the CRR related to Own Funds: Article 24(3); Article 25(2) point b); Article 26(3); Article 27(6); Article 33(2); Article 38(2); Article 46(5); Article 49(2); Article 71(3); Article 73(3); Article 74(2); Article 78(2); Article 461(4); Article 465(3).

Separate consultations on Own Funds will cover draft technical standards related to the following Articles: Article 25(2) point a); Article 29(2); Article 31(2); Article 46(4); Article 84(4); Article 92(4); Article 424(2).

These draft RTS are produced in accordance with Article 10 of the EBA regulation and as per Article 10(4) of the aforementioned regulation, they shall be adopted by means of regulations or decisions. According to EU law, EU regulations are binding in their entirety and directly applicable in all Member States. This means that, on the date of their entry into force, they become part of the national law of the Member States and their implementation into national law is not only unnecessary but also prohibited by EU law, except in so far as this is expressly required by them.

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