Our comments raise issues which are not covered by the Questions which have been explicitly raised in the consultation. Responding in the prescribed way - i.e. by filling in the various boxes which are reserved to providing answers to the Questions - does not allow us to highlight sufficiently the importance that we attach to those unsolicited comments. We, therefore, attach our positioning and urge the EBA to take ALL our comments into account.
Our answer to this specific Question is as follows:
Article 28, (5), (b) mandates the EBA to develop draft regulatory technical standards to specify ‘whether and when multiple distributions would constitute a disproportionate drag on own funds”.
The Consultation Paper addresses the WHEN question. It takes, more particularly the view that multiple distributions constitute a disproportionate drag on own funds if they are more than ¼ higher than the ones on ordinary shares and if all distributions on CET1 instruments exceed 105% of the level reached if all instruments received the same distribution.
The Consultation Paper does not, however, elaborate extensively on the other question, i.e. WHETHER multiple distributions constitute a disproportionate drag on own funds.
- It does not explain why distributions on a non-voting instrument exceeding 25% of the amount of distribution on one voting instrument would constitute ad disproportionate drag on own funds.
- It does not explain either why a total amount of the distributions paid on all Common Equity Tier 1 instruments exceeding 105% of the amount that would have been paid if non-voting instruments received the same distributions as voting instruments, would constitute a disproportionate drag on own funds.
To justify those limits, the Consultation Paper merely explains:
- that differentiated distributions exist in 7 out of 21 EU jurisdictions and multiple dividend rules exist in 4 jurisdictions (see Paragraph 9, page 21);
- that the proposed cap on the coefficient of multiple distributions would, according to available evidence, be in line with the maximum coefficient implemented in one of the few jurisdictions where multiple dividend rules are currently being applied (see Paragraph 19, pages 22 and 23);
- that the value proposed of 125% is not incompatible with the dividend premium, estimated in the academic literature that the markets pay (without providing any specific reference to academic literature (ibidem).
In our view, the proposed model for joint stock companies (rule 1 and rule 2) does not meet the objective. To the contrary even, considering that the proposed model could result in a larger drag on own funds due to the fact that an institution may have to increase in a substantial way the payout to holders of instruments with voting rights to be able to pay out a market conform dividend to holders of instruments with no/fewer voting rights.
We believe the 125% limit to be overly restrictive. We see no indication that larger distributions to non-voting shares would create an undue drag on the capital base. The same holds true for the 105% cap.
Furthermore, even though a dividend multiple, as referred to in Article 28 (4) CRR together with Recital 72 implies that distributions should be paid on all shares issued by the institutions, the RTS could allow for additional flexibility by permitting voting right shareholders to decline distributions.
The answer to this specific Question is as follows:
Article 28, (5), (b) mandates the EBA to develop draft regulatory technical standards to specify ‘whether and when multiple distributions would constitute a disproportionate drag on own funds”.
The Consultation Paper addresses the WHEN question. It takes, more particularly the view that multiple distributions constitute a disproportionate drag on own funds if they are more than ¼ higher than the ones on ordinary shares and if all distributions on CET1 instruments exceed 105% of the level reached if all instruments received the same distribution.
The Consultation Paper does not, however, elaborate extensively on the other question, i.e. WHETHER multiple distributions constitute a disproportionate drag on own funds.
- It does not explain why distributions on a non-voting instrument exceeding 25% of the amount of distribution on one voting instrument would constitute ad disproportionate drag on own funds.
- It does not explain either why a total amount of the distributions paid on all Common Equity Tier 1 instruments exceeding 105% of the amount that would have been paid if non-voting instruments received the same distributions as voting instruments, would constitute a disproportionate drag on own funds.
To justify those limits, the Consultation Paper merely explains:
- that differentiated distributions exist in 7 out of 21 EU jurisdictions and multiple dividend rules exist in 4 jurisdictions (see Paragraph 9, page 21);
- that the proposed cap on the coefficient of multiple distributions would, according to available evidence, be in line with the maximum coefficient implemented in one of the few jurisdictions where multiple dividend rules are currently being applied (see Paragraph 19, pages 22 and 23);
- that the value proposed of 125% is not incompatible with the dividend premium, estimated in the academic literature that the markets pay (without providing any specific reference to academic literature (ibidem).
In our view, the proposed model for joint stock companies (rule 1 and rule 2) does not meet the objective. To the contrary even, considering that the proposed model could result in a larger drag on own funds due to the fact that an institution may have to increase in a substantial way the payout to holders of instruments with voting rights to be able to pay out a market conform dividend to holders of instruments with no/fewer voting rights.
We believe the 125% limit to be overly restrictive. We see no indication that larger distributions to non-voting shares would create an undue drag on the capital base. The same holds true for the 105% cap.
Furthermore, even though a dividend multiple, as referred to in Article 28 (4) CRR together with Recital 72 implies that distributions should be paid on all shares issued by the institutions, the RTS could allow for additional flexibility by permitting voting right shareholders to decline distributions.
Our answers to this specific Question are as follows:
Our comments raise issues which are not covered by the Questions which have been explicitly raised in the consultation. Responding in the prescribed way - i.e. by filling in the various boxes which are reserved to providing answers to the Questions - does not allow us to highlight sufficiently the importance that we attach to those unsolicited comments. We, therefore, attach our positioning and urge the EBA to take ALL our comments into account.
Our answers to this specific question are as follows:
- The proposed limits for different share classes are too restrictive and could potentially harm the available capitalisation possibilities of institutions which are in the scope of the RTS.
- We do not agree that, whenever the 105% limit is breached, ALL dividend multiple instruments would need to be disqualified.
Setting such a requirement would contradict prudential purposes considering that institutions that wish to have a broader capital base need to issue instruments which explicitly do not comply with CET1 requirements (for instance Tier 2-instruments or other) in order to prevent Paragraph 3 to be applicable. This might ultimately result in increasing the amount of capital issuances, which would make the capital base less transparent.
- If the proposed restriction were to be maintained in the final RTS, grandfathering provisions would seem warranted.
Our comments raise issues which are not covered by the Questions which have been explicitly raised in the consultation. Responding in the prescribed way - i.e. by filling in the various boxes which are reserved to providing answers to the Questions - does not allow us to highlight sufficiently the importance that we attach to those unsolicited comments. We, therefore, attach our positioning and urge the EBA to take ALL our comments into account.
Our comments raise issues which are not covered by the Questions which have been explicitly raised in the consultation. Responding in the prescribed way - i.e. by filling in the various boxes which are reserved to providing answers to the Questions - does not allow us to highlight sufficiently the importance that we attach to those unsolicited comments. We, therefore, attach our positioning and urge the EBA to take ALL our comments into account.
Our comments raise issues which are not covered by the Questions which have been explicitly raised in the consultation. Responding in the prescribed way - i.e. by filling in the various boxes which are reserved to providing answers to the Questions - does not allow us to highlight sufficiently the importance that we attach to those unsolicited comments. We, therefore, attach our positioning and urge the EBA to take ALL our comments into account.
Our answers tto this specific question are as follows:
- Article 7b, paragraph 9(b) proposes introducing compliance assessment and information requirements for institutions every time new Common Equity Tier 1 instruments with fewer or no voting rights are issued.
It is important in this context to be aware of a significant difference between Joint Stock companies and Non Joint Stock companies: Joint Stock companies issue capital less often and with significant amounts. Non Joint Stock companies, in contrast, issue capital continuously throughout the year each time a customer subscribes capital (usually for an insignificant amount of money). The subscription of capital for Non Joint Stock companies, therefore, happens, if not on a daily basis, then at least frequently. It would obviously not be operational for either the Non Joint Stock companies or their supervisory authorities if they would provide a large number of successive reports over the year each time new capital with no or few voting rights is issued.
It is our clear view that the information reported under paragraph 9 (a) will be fully sufficient for monitoring compliance with the conditions in paragraph 5 and 6. Paragraph 9 should be reworded to reflect this.
- Article 7b, paragraph 10, introduces some exemptions to the conditions set in Article 7b, paragraph 5, Points (a) and (d) in the event of recapitalisations or “other emergency situations”.
Our understanding is that the expression “other emergency situations” need to be understood broadly to include, more particularly, situations in which banks have to capitalise themselves to comply with CRD IV buffer requirements.
Our comments raise issues which are not covered by the Questions which have been explicitly raised in the consultation. Responding in the prescribed way - i.e. by filling in the various boxes which are reserved to providing answers to the Questions - does not allow us to highlight sufficiently the importance that we attach to those unsolicited comments. We, therefore, attach our positioning and urge the EBA to take ALL our comments into account.
Our answers to this specific question are as follows:
Paragraph 5 (c) of Article 7b, states that the average of the distribution on voting instruments during the preceding five years must be low in relation to other comparable instruments. Moreover, paragraph 5(d) of Article 7b, requires the institution to demonstrate to the satisfaction of the competent authority that the payout ratio is low and specifies, moreover, that any payout ratio under 30% shall be deemed to be low.
Concerning the payout ratio, it needs to be highlighted that an average payout below 30% conversely implies that institutions must retain at least 70% of the accumulated profit over 5 years. There is no special interest which can justify such rulemaking for non-joint stock companies that interfere noticeably with the business model and opportunities for raising capital.
The following needs to be observed in this context:
- for non-joint stock companies distributions are the only source of return for investors. A payout ratio below 30% would make it extremely difficult for them to attract capital considering that there is no upside in the form of a capital gain on the shares;
- the Basel III rules did not incorporate similar restrictions for differentiated distributions;
- CRD IV and CRR already contain provisions that were designed to protect capital, including the capital conservation buffer, the countercyclical buffer, the ability to suspend interest payments on additional Tier 1 capital, as well as the determination of an individual solvency requirement as a result of the Supervisory Review and Evaluation Process.
On these grounds, we believe the proposed limit to be too restrictive. It should be removed or, alternatively, be raised significantly.
Anyway, if a requirement concerning a payout restriction were to be maintained in the final RTS, it is of utmost importance that– even if the proposed limit would be raised significantly the calculation would not be based on levels of distributions made before the CRR came into force.
- An institution's ability to make distributions would, according to the proposal, be limited by its historical decisions – although the implications of those decisions were not known or foreseeable. This would in effect amount to introducing retroactive legislation.
- It needs to be highlighted, moreover, that the financial performance of institutions during the five year period before the CRR came into force has been challenged due to the financial crisis. This meant an upward pressure on the payout ratio out of meager net profits in this particular period
If a requirement concerning a payout restriction based on average distributions over the preceding five years is maintained, it is therefore crucial to have a transitional arrangement where the number of preceding years that are included in the calculation of the average distributions is phased in gradually; starting with only one year in 2014, where the payout ratio is based upon the accumulated profits in 2013, going on to two years in 2015, where the average payout ratio is based on the accumulated profits in 2013 and 2014, and increasing until reaching five years in 2018,where the average payout ratio is based on the accumulated profit in 2013, 2014, 2015, 2016 and 2017.
Our comments raise issues which are not covered by the Questions which have been explicitly raised in the consultation. Responding in the prescribed way - i.e. by filling in the various boxes which are reserved to providing answers to the Questions - does not allow us to highlight sufficiently the importance that we attach to those unsolicited comments. We, therefore, attach our positioning and urge the EBA to take ALL our comments into account.
