Is the prior permission of the supervisor required when an institution reduces its CET1 instruments by absorbing losses which were already accounted for as retained losses (i.e. loss brought forward)?
An institution can decide to allocate what was previously accounted for as retained losses (or loss brought forward) to its CET1. By doing so, the CET1 instruments absorb the losses by means of a write-down of the nominal amount or a reduction of the quantity of instruments. The rationale for Article 77 seems to require the prior permission of the competent authority for any reduction of own funds instruments which is not motivated by losses, as it deteriorates the capital ratios of an institution. On the contrary, using CET1 instruments to absorb the loss brought forward does not reduce the CET1 amount of the institution, as these retained losses were already deducted from CET1 in application of Article 26 CRR. As in this case there is no impact on the solvency situation of the institution, it would be appropriate to not require the prior permission of the supervisor.
Article 77(1)(a) of Regulation (EU) No 575/2013 (CRR) requires that an institution shall obtain
require the prior permission of the competent authority to 'reduce, redeem or repurchase Common Equity Tier 1 (CET1) instruments issued by the institution in a manner that is permitted under applicable national law'. Accordingly, any reduction in CET1 instruments, even in cases where the solvency situation of the institution is unaffected by the proposed reduction, shall require the prior permission of the competent authority, which shall be granted in accordance with the conditions specified under Article 78(1) of the CRR.
Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).