Consultation on Draft Regulatory Technical Standards on Own Funds

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.