There is an agreement for transfer of profit and coverage of losses (i.e. Profit and Loss Transfer Agreement, PLTA) between the credit institution in question and its mother credit institution, therefore the shares of the credit institution are in the future no longer eligible as a CET1 items (confer Question ID 408/2013 – now archived).
In conjunction with the out-phasing of these shares pursuant to the transitional provisions in Article 484 ff CRR, the questions arises if the share premium accounts also have to be out-phased or if they are still eligible as CET 1 instruments according to the provisions laid down in Article 485 para. 2 CRR.
Are the conditions set out in Article 28 para. 1 letter (i) CRR met, if a credit institution has also (in addition to CET 1 instruments) T2 instruments which may be repaid before liquidation only with a proportional deduction of the net losses incurred during its lifetime?
Pursuant to Article 485 para. 2 CRR share premium ac-counts shall qualify as Common Equity Tier 1 items if they meet the conditions laid down in letter (i) and (j) of Article 28 of this Regulation. Pursuant to Article para. 1 letter (i) CRR capital instruments shall only qualify as Common Equity Tier 1 instruments if 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 credit institution in question has, additional to CET1 instruments, T2 instruments which may be repaid before liquidation only with a proportional deduction of the net losses incurred during its lifetime. Therefore, it could be possible that those T2 instruments would absorb loss before the share premium accounts.
The first part of the question relates to the eligibility of share premium accounts on grandfathered shares as Common Equity Tier 1 ("CET1") instruments.
Article 484 of Regulation (EU) No 575/2013 (CRR) applies to share premium accounts relating to instruments issued or eligible as own funds prior to 31 December 2011 and Article 485
of CRR applies to share premiums relating to instruments issued or eligible as original own funds prior to 31 December 2010.
of CRR provides that the related share premium accounts that qualified as original own funds under the national transposition measures for Article 57(a) of Directive 2006/48/EC shall qualify as CET1, subject to Article 485 of CRR and to the limits of Article 486(2) CRR, notwithstanding that the conditions of Article 28 of CRR (or Article 29 of CRR where applicable) are not met.
of CRR provides that the share premium accounts related to instruments that were issued or were eligible as original own funds under the national transposition measures for Article 57(a) of Directive 2006/48/EC prior to 31 December 2010 shall qualify in full as CET1 if conditions of Article 28(1)(i) and (j) of CRR are met.
The second part of the question relates to the eligibility of CET1 instruments (including share premium accounts on CRR-qualified shares) if the firm also has loss-absorbing Tier 2 instruments.
According to Article 28(2)
of CRR, the conditions laid down in Article 28(1)(i) CRR shall be deemed to be met notwithstanding a write-down on a permanent basis of the principal amount of Tier 2 instruments.
Repaying Tier 2 instruments after the deduction of net losses is economically equivalent to a permanent write down followed by redemption. Therefore, the possibility that those Tier 2 instruments may absorb losses before CET1 instruments should not automatically disqualify instruments as CET1.
This answer has been modified on 09/11/2015 to correct an erroneous partial omission of the last paragraph.
The Q&A was submitted based on CRR1 provisions according to which PLTAs were assessed as contradicting Article 28(1)(h)(v) CRR. To note that Article 28(3) CRR has been amended by Regulation (EU) 2019/876 and PLTAs are now accepted subject to specific conditions provided under this Article.
Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR).