The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on own funds (Part IV) aimed at setting harmonised criteria for instruments with multiple distributions that would create a disproportionate drag on capital, as well as clarifying the meaning of preferential distributions. These RTS will be part of the Single Rulebook in banking aimed at enhancing regulatory harmonisation in the European Union (EU) and at strengthening the quality of capital.

In this particular area of own funds, the EBA's mandate is twofold: one is related to multiple distributions and the other one to preferential distributions, which have been considered separately for joint-stock companies and non-joint stock companies. The provisions of these final draft RTS detail, in particular, whether and when multiple distributions would create a disproportionate drag on capital and clarify the meaning of preferential distributions – namely preferential rights to payments of distributions and order of payments of distribution. Furthermore, these RTS deal with the consequences of not meeting the criteria provided for in the regulation in terms of (dis)qualification of instruments as CET1 capital.

Instruments with multiple distributions

Capital instruments may include provisions that give rise to distributions that are a multiple of the distributions paid on voting Common Equity Tier 1 (CET1) instruments (multiple distributions). However, only a subset of those instruments would be considered not to create a disproportionate drag on capital, and could therefore be included in CET1.

The draft final RTS aim at specifying harmonised criteria which are to be met by those instruments that are to be included in CET1, so as to ensure that the future loss absorbency of CET1 instruments is in no way compromised by disproportionate distributions that would create a drag on capital. In this respect, quantitative limits are set. These limits are expressed (i) in terms of the amount of distribution on one non-voting instrument with a multiple dividend compared with the amount of distribution on one voting instrument and (ii) in terms of the total amount of distribution paid on CET1 instruments. These criteria are restricted to joint stock companies.

Instruments with preferential distributions

Preferential distributions exist when holders of CET1 instruments have an advantage compared with other holders of CET1 instruments of the same institution, particularly regarding the timing and order of distribution payments. In addition, also those instruments where the distributions exceed the limits set with respect to multiple distributions are considered as preferential. In clarifying the definition of preferential distributions, these RTS aim at ensuring equal treatment among CET1 holders.

For joint stock companies, the approach is the same as for multiple distributions. For non-joint stock companies, and in order to take into account the specific features of this type of institutions, the approach is based on a set of criteria not strictly based on hard quantitative limits but on a combination of different factors related to the general features of instruments issued by non-joint stock companies. These criteria reflect, in particular, the nature of the holders of the non-voting instruments, the existence of a legal cap on the voting instruments, the voting rights and the average level of distributions.

Legal basis and next steps

The proposed draft RTS have been developed on the basis of Regulation 575/2013 of the European Parliament and of the Council of 26 June 2013 (CRR) on prudential requirements for credit institutions and investment firms.

The final standards have been sent to the European Commission for their adoption as EU Regulations that will be directly applicable throughout the EU.

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on own funds ‘Part three', which set out criteria to deduct indirect and synthetic holdings, to define broad market indices and to calculate minority interest. These final draft RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in Europe and namely at strengthening the quality of capital.

In particular, three are the key objectives of the draft RTS:

• On deduction of indirect and synthetic holdings: to achieve greater harmonisation as well as increased conservatism in the way deductions of investments in financial sector entities as well as own capital instruments are applied;

• On broad market indices: to set criteria for broad market indices so as to avoid that the interest rate/dividend paid by institutions on floating rate capital instruments increases when the credit standing of the institution decreases (credit sensitive dividend features);

• On minority interest: to harmonise the calculation of minority interests to be included in regulatory capital.

Legal basis

These RTS stem from additional mandates granted to the EBA in the final version of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (colloquially known as Capital Requirements Regulation or CRR). They complement the final draft RTS on own funds (‘Part one' and ‘Part two'), which were submitted to the EU Commission and published on the EBA website on 26 July 2013.