2014_1226 Eligibility of subordinated loans for classification as Tier 2 instruments when the rules governing their issue contemplate an obligation of the issuer to repurchase a percentage of them (eligibility limited to the amount of subordinated lo

Question ID:

2014_1226

Legal Act:

Regulation (EU) No 575/2013 (CRR)

Topic:

Own funds

Article:

63, 66

Paragraph:

k, a

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

Not applicable

Article/Paragraph:

not applicable

Disclose name of institution / entity:

Type of submitter:

Law firm

Subject Matter:

Eligibility of subordinated loans for classification as Tier 2 instruments when the rules governing their issue contemplate an obligation of the issuer to repurchase a percentage of them (eligibility limited to the amount of subordinated loans not subject to such repurchase obligation).

Question:

Pursuant to the combined application of articles 63 letter k) and 66 letter a) it is correct that a clause – also included in the rules governing the issue of subordinated loans – according to which an issuer is obliged to repurchase a specified amount of subordinated loans does not prevent from classifying such financial instruments as Tier 2 instruments if, in compliance with article 66 letter a), the percentage of subordinated loans that shall be repurchased by the issuer is deducted from Tier 2 items? In other words, a subordinated loans can be classified as Tier 2 instruments if the provisions governing their issue contemplate the undertaking of the issuer to repurchase a specified percentage of the issued subordinated loans provided that - in compliance with article 66 letter a) of CRR - such percentage is deducted from Tier 2 items? The undertaking of the issuer to repurchase part of subordinated loans deriving from the rules governing the issue of such subordinated loans can be considered as a repurchase “contractual obligation” and as a consequence may it fall within one of the cases contemplated under the provisions of article 66 letter a) of CRR?

Background on the question:

Pursuant to article 63 letter k) of CRR subordinated loans are eligible to be qualified as Tier 2 instruments if, among others, the issuer is not bound - neither from the rules governing the subordinated loans nor from any other provisions - to repurchase them. However, article 66 letter a) of CRR provides the obligation to deduct from Tier 2 instruments “direct, indirect and synthetic holdings by an institution of its own Tier 2 instruments, including its own Tier 2 instruments that an institution could be obliged to purchase as a result of existing contractual obligations”. The rules governing a subordinated loan contemplate the undertaking of the issuer to repurchase a specified percentage (10%) of the issue.

Date of submission:

21/05/2014

Published as Final Q&A:

29/08/2014

Final Answer:

A subordinated loan whose provisions contain an obligation on the borrower to repurchase any portion of the loan amount breaches the criteria contained in Article 63(i) & (k) of Regulation (EU) No 575/2013 (CRR) and renders the full amount of the loan ineligible for Tier 2 (cf. Article 65 lit. a CRR).

The reference to "existing contractual obligations" in CRR Article 66(a) means contractual obligations other than those deriving from the terms and conditions of Tier 2 subordinated loans.

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.