Question ID:
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Own funds
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Not applicable
Disclose name of institution / entity:
Name of institution / submitter:
De Nederlandsche Bank
Country of incorporation / residence:
The Netherlands
Type of submitter:
Competent authority
Subject Matter:
Deduction from CET1 of significant holdings in financial sector entities (FSE) and protection acquired to limit downside investment exposure

Will the hedge with the 3rd party as described in the example in the background result in the deduction from CET1 (as per Article 36 CRR) being reduced from €750m to €250m?

Background on the question:

Article 36(1)(i) of the CRR determines that institutions shall deduct from CET1 items the applicable amount of direct, indirect and synthetic holdings by the institution of the CET1 instruments of FSEs where the institution has a significant investment in those entities. This is subject to the threshold exemptions from deduction from CET1 items contained in Article 48 of the CRR. According to Article 45 of the CRR, institutions may calculate direct, indirect and synthetic holdings of CET1 instruments of the FSEs on the basis of the net long position provided the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year.

Assume that an institution holds a participation of €4.75bn (goodwill excluded) in an FSE which qualifies as a significant investment. Assume also that the institution’s CET1 deduction in relation to this FSE investment amounts to €750m on a fully loaded basis (deduction threshold assumed to amount to € 4bn). To reduce its FSE exposure and the related deduction from CET1, the institution may consider entering into a transaction with a 3rd party non-bank. This 3rd party would provide cash collateralized protection to the institution for its holding in the FSE for a period of 4 years, which would limit the institution’s exposure to the downside below the agreed strike level of €500m. The institution would have the right to terminate the hedge at any time. The institution would retain full legal title to the FSE-shares.

Date of submission:
Published as Final Q&A:
Final Answer:

The mechanism described in the question will not have the effect of reducing the CET1-deduction, as there is no effective hedge and the hedge would not provide first loss cover. According to Q&A 2014_1382, a derivative must fully and promptly offset any changes in value arising in the long position in the own funds instrument. In the example, the hedge would only provide protection for the last €500m of loss; implying that the required full and prompt offset is absent. More generally, the aim of the described mechanism which is to offset regulatory adjustments is considered inappropriate.

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.