Art. 52 (1)(l)(i) Regulation (EU) No 575/2013 (CRR) refers to ‘distributable items’ as defined in Art. 4 (128) CRR which refers further into applicable national law and the statutes of the institution. Does such reference also consider items that are non-distributable under applicable national law or the statutes of the institution only for common stock or, alternatively, only following a net assets or insolvency related test?
The credit assessment and trading prices of AT1 instruments are strongly correlated to the risk of coupon suspension. Markets associate this risk with 1) maximum distributable amount restrictions (MDA) and 2) sufficiency of available distributable items (ADI). CRR indicates ADI should be calculated based on banks’ solo accounts prepared under local GAAP and applicable local law. As these differ from jurisdiction to jurisdiction, banks face an unlevel playing field in terms of how ADI calculations are carried out – banks with identical own funds positions may face substantially different risk perception and consequently costs of AT1 capital. The concept of distributable items / ADI comes from provisions created to govern distributions on common equity, specifically voting ordinary shares. It is not an approach that translates well to other capital instruments of different rank such as AT1. Non-payment of a common dividend due to the absence of distributable items - or any de facto distribution restriction - is a cashflow problem for the equity holder since the omitted dividend remains as economic substance with the bank in which the equity investor holds a proportionate share. In the case of the AT1 investor, such non-payment is non-cumulative and cannot be recovered (and actually benefits the equity holder). This effectively subordinates the AT1 investor to equity investors in terms of coupons / dividends in the case of an ADI constraint. This has significant valuation consequences for AT1 instruments. The uneven level playing field can be addressed by applying a different interpretation of CRR provisions. Under such interpretation, ADIs would take into account blocking provisions for profits and reserves only as they would relate to the relevant capital layer. This reflects the corporate law and civil code nature of AT1.
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