The Committee of European Banking Supervisors (CEBS) publishes today its proposals for a common EU definition of Tier 1 hybrids. CEBS proposals respond to a letter by the European Commission of April 2007
Their objective is not to create a new definition for eligible Tier 1 hybrid capital instruments but to provide guidelines for a common EU interpretation of the eligibility criteria and to advise the European Commission with regard to the implementation of these criteria into EU legislation.
The proposals are based on eligibility requirements set out in the "Sydney Press Release" issued by the Basel Committee for Banking Supervision in 1998 ("the Sydney Press Release"), the current supervisory practices across the EU as well as information provided by market participants during the public consultation of the draft proposals CP 17
whcih had been also published on CEBS website.
CEBS proposes that hybrid capital instruments should only be eligible as Tier 1 capital if they meet all of the following requirements: they must be issued and fully paid up, publicly disclosed and easily understandable. They must be permanent, able to absorb losses in liquidation and on a going concern basis and allow the cancellation of payments. In stress situations, the instrument should help prevent its insolvency and make the recapitalisation of the issuer more likely.
CEBS also believes that regulatory capital requirements should be met without undue reliance on hybrid instruments and puts forward two options for the limitation of Tier 1 hybrids. The objective of both options is to strengthen the quality of an institution's regulatory capital.