2017_3521 CET1 Instruments | European Banking Authority

Question ID:: 2017_3521
Legal Act:: Regulation (EU) No 575/2013 (CRR)
Topic:: Own funds
Article:: 28
Paragraph:: 1
Subparagraph:: j
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:: Not applicable
Article/Paragraph:: N/A
Disclose name of institution / entity:: No
Type of submitter:: Other
Subject Matter:: CET1 Instruments
Question:: May a CET1 instrument rank pari passu in liquidation with a legacy Tier 1 instrument that is being grandfathered as Additional Tier 1 under Article 484, and otherwise qualifies as Tier 2 under the CRR?
Background on the question:: Article 28(1)(j) specifies that CET1 "instruments rank below all other claims in the event of insolvency or liquidation of the institution". However this is clarified by a further paragraph that "The condition set out in point (j) of the first subparagraph shall be deemed to be met, notwithstanding the instruments are included in Additional Tier 1 or Tier 2 by virtue of Article 484 (3), provided that they rank pari passu." Article 484 Paragraph (3) deals with the grandfathering of instruments as CET1, and therefore I cannot see how any instrument can be included in Additional Tier 1 or Tier 2 by virtue of Article 484(3). I believe that the intention of Article 28 was to state that a CET1 instrument may rank pari passu with another instrument that is eligible to be grandfathered as CET1 under Article 484(3). If the intention was that a CET1 instrument can rank pari passu with another instrument that is being grandfathered as Additional Tier 1 or Tier 2 under Article 484, this would imply issuance of CET1 instruments ranking pari passu with more senior forms of legacy capital (i.e grandfathered AT1 and T2) is permitted, but ranking pari passu with more junior forms of legacy capital (i.e. grandfathered CET1) is not. Article 52 includes a similar clause and clarification on ranking "(d) the instruments rank below Tier 2 instruments in the event of the insolvency of the institution;" "The condition set out in point (d) of the first subparagraph shall be deemed to be met notwithstanding the fact that the instruments are included in Additional Tier 1 or Tier 2 by virtue of Article 484(3), provided that they rank pari passu." A consistent interpretation of the intention behind these clauses in Article 28 and Article 52 can only be that Common Equity Tier 1 and Additional Tier 1 instruments will be deemed to meet their obligations under Article 28(j) and Article 52(d) respectively, even if they rank pari passu with an instrument that does not qualify as the same quality of capital under Article 28 and Article 52 respectively, but is eligible for grandfathering as that level of capital under Article 484.
Date of submission:: 12/09/2017
Published as Final Q&A:: 27/04/2018
Final Answer:: The purpose of the last paragraph in Article 28(1) CRR, which complements Article 28(1)(j) CRR, is to provide for cases where legacy capital instruments (of the lowest rank) are grandfathered as CET1 under Article 484(3) CRR.
Pursuant to Article 484(3) and Article 487(1) CRR, one part of the legacy capital instrument is recognised in CET1, and up to the limit provided for in Article 486(2) CRR, (the “grandfathered part”), while the part of the legacy capital instrument exceeding that limit is recognised in AT1 pursuant to Article 487(1) CRR or T2 pursuant to Article 487(2) CRR, and up to the limits provided for in Article 486(3) CRR and Article 486(4) CRR respectively (the “residual part”).
Hence, the provision of the last paragraph in Article 28(1) CRR only accounts for cases where issuances of fully eligible CET1 will rank pari passu with elements of AT1 and/or Tier 2 (“residual part”) of legacy capital instruments.
The criteria of Article 28(1)(j) CRR, specifying that CET1 "instruments rank below all other claims in the event of insolvency or liquidation of the institution", is not contravened when new issuances of CET1 instruments by an institution rank pari passu with legacy capital instruments of the institution which are being grandfathered as CET1 following the requirements of Article 484(3) CRR complemented by the requirements of Article 487(1) and (2) CRR.
The criteria of Article 28(1)(j) CRR would however be contravened if the new issuance of CET1 was to rank pari passu with legacy instruments which are being grandfathered as AT1 or Tier 2 following the requirements of Article 484(4) or 484(5) CRR.
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.