2013_541 Eligibility of capital instruments for classification as Common Equity Tier 1 instruments when the instruments are supplemented by a contractual obligation of the majority-shareholder to pay a fixed yearly compensation to the minority share

Question ID:

2013_541

Legal Act:

Regulation (EU) No 575/2013 (CRR)

Topic:

Own funds

Article:

Paragraph:

1(i), 1(h)

Subparagraph:

COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:

Not applicable

Article/Paragraph:

Not applicable

Disclose name of institution / entity:

Type of submitter:

Competent authority

Subject Matter:

Eligibility of capital instruments for classification as Common Equity Tier 1 instruments when the instruments are supplemented by a contractual obligation of the majority-shareholder to pay a fixed yearly compensation to the minority shareholders

Question:

Para 1 point (i) of Article 28 of Regulation (EU) No 575/2013 (CRR) states that "compared to all the capital instruments issued by the institution, the instruments absorb the first and proportionately greatest share of losses as they occur, and each instrument absorbs losses to the same degree as all other Common Equity Tier 1 instruments". The question is, whether a contractual obligation of the majority shareholder of a credit institution to pay a fixed yearly compensation to the minority shareholders even in loss years (by reason that the majority shareholder and the credit institution have entered into a profit and loss transfer agreement) is permissible according to para 1 point (i) of Article 28 CRR?

Background on the question:

The majority-shareholder and the credit institution have concluded a profit and loss transfer agreement to make use of preferential tax regulations (group taxation). In the concerned case the minority-shareholders of the credit institution are the owners of the majority-shareholder of the credit institution.

Date of submission:

19/11/2013

Published as Final Q&A:

16/05/2014

Final Answer:

Article 28(1)(i) of Regulation (EU) No. 575/2013 (CRR) states that Common Equity Tier 1 (CET1) instruments must absorb the first and proportionately greatest share of losses as they occur, and each instrument absorbs losses to the same degree as all other CET1 instruments. A profit and loss transfer arrangement between the majority shareholder and the credit institution, which results in a contractual obligation of the majority shareholder of the credit institution to pay a fixed compensation to the minority shareholder of the credit institution, does not meet this requirement.

Such a profit and loss transfer arrangement could also result in an obligation on the credit institution to pay distributions if this is required to maintain the fixed compensation payment to the minority shareholder, which would be non-compliant with Article 28(1)(h) of the CRR.

Status:

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.