The EBA updates on the monitoring of Additional Tier 1, Tier 2 and TLAC/MREL eligible liabilities instruments of European Union institutions

The European Banking Authority (EBA) published today an updated Report on the monitoring of Additional Tier 1 (AT1), Tier 2 and total loss absorbing capacity (TLAC) and minimum requirement for own funds and eligible liabilities (MREL) instruments of European Union (EU) institutions. The Report merges the information of the two previous separate reports in these fields and adds new recommendations on certain contractual clauses of the corresponding documentation. By merging the contents of these two reports, the EBA aims to facilitate the reading and to highlight the commonalities in terms of eligibility criteria between own funds and eligible liabilities instruments.

Overall, the EBA has observed convergence and standardisation in terms of drafting of the terms and conditions of the instruments and issuance programmes, also as a result of the implementation of previous EBA recommendations. The EBA expects that forthcoming issuances will continue to retain a high level of standardisation in their terms and limit complexity.

In light of the results of the continuous monitoring activities, a few new recommendations have been added. In particular, TLAC/MREL disqualification events clauses in own funds issuances are deemed acceptable; risk-adjusted capital Tier 2 instruments (RAC Tier 2) are discouraged; alignment event clauses are allowed under certain conditions; institutions should be able to demonstrate that interest rate reset mechanisms do not entail incentives to redeem; a certain degree of supervisory flexibility has been introduced on tap issuances from small issuers, in particular in case of episodes of market volatility. Finally, the report explains some investigations that the EBA is conducting on the prudential valuation of non-CET1 instruments.

Going forward, the EBA will continue to monitor the quality of the AT1, Tier 2 and TLAC/MREL instruments and stand ready to provide additional guidance where necessary.

Legal basis and background

In accordance with Article 80 of the CRR on the continuing review of the quality of own funds, ‘the EBA shall monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union and shall notify the Commission immediately where there is significant evidence that those instruments do not meet the respective eligibility criteria set out in this Regulation’.

The EBA has previously published two separate reports on AT1 monitoring in June 2021 and on the monitoring of TLAC/MREL eligible liabilities instruments in October 2022.