Question ID:
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Own funds
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Disclose name of institution / entity:
Type of submitter:
Competent authority
Subject Matter:
Deferral of Tier 2 coupons

Can Tier 2 instruments include terms according to which coupons would be mandatorily deferred or cancelled if coupons were not paid on Additional Tier 1 instruments?

Background on the question:

Some existing Tier 2 instruments include such terms. Institutions may therefore raise the issue of consistent treatment. In addition, coupons deferral for Tier 2 instruments may become more common for ratings purposes as certain rating agencies may give more equity credit for Tier 2 instruments with coupons deferral.

Date of submission:
Published as Final Q&A:
EBA Answer:

If Tier 2 instruments include such terms, this would undermine coupon flexibility on Additional Tier 1 instruments (as a decision to cancel Additional Tier 1 coupons would automatically lead to the deferral or cancellation of coupons on Tier 2 instruments). The criterion referred to in Article 52 (1) (l) (v) of Regulation (EU) No 575/2013 (CRR), which requires that "the cancellation of distributions imposes no restrictions on the institution" would then not be met by outstanding Additional Tier 1 instruments of the institution. Those instruments would then have to be disqualified from regulatory Tier 1 capital, although Tier 2 instruments including the above mentioned terms would themselves be eligible as regulatory Tier 2 capital. 

Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.