2013_543 Eligibility of capital instruments for classification as Common Equity Tier 1 instruments when the instruments are supplemented by a contractual obligation of the majority-holder of those instruments to pay compensation to the minority shar

Question ID:

2013_543

Legal Act:

Regulation (EU) No 575/2013 (CRR)

Topic:

Own funds

Article:

Paragraph:

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-holder of those instruments to pay compensation to the minority shareholders even in loss years

Question:

Paragraph 1 (I) (ii) of Article 28 Regulation (EU) No. 575/2013 (CRR) states that “the instruments are not secured, or subject to a guarantee that enhances the seniority of the claim by the parent undertaking of the institution”. The question is, whether a contractual obligation of the majority shareholder of a credit institution to pay a 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 paragraph 1 (I) (ii) of Article 28 CRR? In more general terms, what is the meaning of the word “claim” in paragraph 1 (I) of Article 28 CRR (claim only to the substance/equity of the credit institution, or also to a dividend or to a compensation payment or all)?

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:

04/07/2014

Final Answer:

Article 28(1)(l) of Regulation (EU) No. 575/2013 (CRR) prohibits the enhancement by the issuer or related entity, as specified in points (i) to (v), of any claim on an instrument to payment vis-à-vis unsecured/-guaranteed claims or claims of more senior positions in the institution's creditor hierarchy. The claim on an instrument includes, inter alia, the payment of principal, dividends, or in the event of the institution's liquidation, its residual assets.

An arrangement, contractual or otherwise, whereby the issuer or related entity guarantees to pay a compensation to shareholders even in loss years enhances the seniority of those shareholders and therefore is non-compliant with Article 28(1)(l) 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.