Austrian Federal Economic Chamber/Division Bank & Insurance
Article 25 (5) (b) requires the EBA to “(…) develop draft regulatory technical standards to specify (…) whether and when multiple distributions would constitute a disproportionate drag on own funds”.
The draft RTS gives the EBA’s definition, when multiple distributions constitute a disproportionate drag on own funds: if they are more than ¼ higher than the ones on voting common equity tier 1 instruments and if all distributions on CET1 instruments exceed 105% of the level reached if all instruments received the same distribution.
We fail to see the EBA’s point on whether multiple distributions would constitute a disproportionate drag on own funds. The EBA gives no reasoning why a distribution on a non-voting instrument which is 25% higher than on a voting instrument would constitute a disproportionate drag on own funds. We also do not understand why a distribution which is 5% higher than an even distribution on all CET1 instruments would constitute such a disproportionate drag on own funds.
We consider the formulation of two conditions as too excessive. Besides a decrease in competitiveness, the condition laid down in Art. 7b (1) (a) constitutes an unnecessarily excessive limitation of flexibility. The condition laid down in Art (7b) (1)(b) is sufficient to reach the objectives of these RTS. In case an institution decides to formulate a higher dividend multiple than proposed in Art. 7b (1) (a) the maximal amount of instruments issued would correspondingly be lower. We therefore propose to dismiss the introduction of two quantitative limits and to only maintain the limit expressed in terms of the total amount of distribution paid on CET-1 instruments [Art. 7b (1) (b)], or at least to raise the limit of 125% ot 150%. We consider the specified percentage (105%) as unreasonably low and propose to increase the percentage to 110%
Both limits seem to be very hard and restrictive as different market conditions at the time of issuance are not reflected. Due to changing risk profiles of the institution the potential holder of non-voting instruments will accept - depending on the date of issuance of the non-voting instruments – different multiple distributions. Therefore different multiples at different dates of issuance should be possible.
On the one hand institutions are enforced to strengthen their capital base with CET 1-instruments whereas on the other hand there are further regulatory impediments proposed for the issuance of such instruments. Therefore we have serious doubts on the attraction of investments in such instruments above all within the current market circumstances.
In effect the proposed provisions would lead to a certain disproportionate drag on voting instruments as distributions on voting instruments need to be higher to fulfil market expectations on distributions of non-voting instruments. Further it should be kept in mind that the holders of voting instruments can always decide to distribute retained earnings, i.e. the main aim to hinder a drag on capital is not hindered but rather shifted to distributions on voting instruments.
From a technical point of view it is not fully clear on which basis the calculation of the thresholds (Art. 7b(1)(a),(b)) for multiple dividends should be carried out: whether on the nominal amount or on the number of shares. We understand, that the nominal amount should be taken into consideration, but we would invite EBA to draft such provision more clearly in the text of the draft RTS. The proposed calculation method focusing on the number of instruments leads to overwhelming outcomes. It should be clarified that the nominal value resp. the purchase price at issuance is the basis for calculation as the number of voting and non-voting instruments could differ due to different nominal values resp. purchase prices at issuance.
For additional examples please see the attached document.
Example case 1:
Art. 7b (1) compares distributions on different instruments without taking into account, that these instruments may have different nominal values. Differences in distributions are no issue of multiple dividends as long as they are proportional to the differences in the nominal value.
Therefore we propose to amend the formulas as followed:
Art. 7b (1a): l <= 1,25 x k x b/a
Art. 7b (1b): kX/a + lY/b <= (1,05) x k/a x (X +Y)
“a” represents the nominal value of one voting instrument and
b” represents the nominal value of one non-voting instrument.
Example case 2:
Acc. to Art. 28 (1) h iv CRR cooperative banks may determine the level of distributions on the basis of the amount for which the instruments were purchased at issuance. When a cooperative bank issues voting instruments at nominal value and non-voting instruments at the purchase price at issuance the same problem as before arises: differences in distributions are no issue of multiple dividends as long as they are proportional to the differences in the purchase price.
Example case 3:
Cooperative shares may have the nominal value = purchase price at issuance of 100
non voting cet-1-instruments may have a market value = purchase price of 1.000
If the level of distribution in this case is determined on the basis of the purchase price at issuance again it is obvious that the holders of the non voting cet-1 instruments would expect at least a distribution of 60 for each instrument, if the holders of cooperative shares get a distribution of 6 per share.
Art 7b (1) seems to forbid that, but this cannot be the intention. This should be clarified too.
Art 7b Abs 5 lit b should read:
(b) The number of the voting rights of any single holder is limited, either for example because each holder only receives one voting right irrespective of the number of voting instruments he holds, or because the number of voting instruments any holder may hold is limited under the statutes of the institution or under applicable national law;
The RTS should stick to the principle and only clarify this principle by examples instead of trying to meet all relevant cases.
Therefore we propose to amend the formulas as followed:
Art. 7b (1a): l <= 1,25 x k x d/c
Art. 7b (1b): kX/c + lY/d <= (1,05) x k/c x (X +Y)
“c” represents the nominal value of one voting instrument and
"d” represents the nominal value of one non-voting instrument."
The proposal to disqualify all dividend instruments when the limit is breached is unreasonably severe. Some legal impediments can emerge due to the national company law, e.g. the General Assembly decides to pay distributions on non-voting instruments but not on voting instruments. Another case could be that the General Assembly decides to make distributions on voting instruments but waive the payments on voting instruments.
There could also be the case that provisions on non-voting instruments are already changed with the aim to reach full CRR-eligibility. If there are higher multiples than proposed within the EBA BTS such instruments would be completely disqualified according to this draft and also not fall under the transitional provisions of CRR.
Examined in more detail, it seems that the punitive character of this proposal actually undermines the aim of preventing a disproportionate drag on capital. To prevent this paradox result, only the amount of instruments correspondingly exceeding the determined percentage should disqualify from CET-1.
Sectors with NJSC member institutions welcome the differentiation between JS and NJS. However it seems that the decision tree is not fully reflected in the legal text (Art. 7b par. 5 and 6). Especially on the limitation on voting rights in Art. 7b par 5 the case is not reflected that the number of voting instruments is unlimited but die voting right itself is limited (e.g. 5 voting instruments have one voting right).
According to Art. 7b par. 2 lit. d the same dividend multiple shall apply to all instruments with a dividend multiple. Due to different market expectations at the date of issuance a corridor between 100% and limits on multiples up to [200% - tbd] should be possible.
Not in all jurisdictions non-voting instruments may be subscribed only by voting shareholders.
Furthermore it is not common that legal caps are externally set by national applicable law. There is rather the possibility to have a cap. The cap itself is normally set statutorily or contractually. Also the CRR does not differentiate between legal and statutory caps.
The definition of the payout ratio is not clear. It should be kept in mind that usually National Generally Accepted Accounting Principles are the basis for distributions. The focus on profits seems to be too narrow as profits usually are items after the booking of reserves. The definition of the payout ratio acc. Art. 7b par 7 should rather be calculated on the basis of distributable items acc. Art. 4 (1) 128 CRR.