- Question ID
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2023_6932
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Own funds
- Article
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26
- Paragraph
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1
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Not applicable
- Article/Paragraph
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Not applicable
- Type of submitter
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Competent authority
- Subject matter
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Ability of the Share Premium to absorb losses
- Question
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Can the Share Premium be recognised as CET1 capital if there are features preventing its use to absorb losses?
- Background on the question
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Article 26(1) CRR provides that items included in points (c) to (f) of the same paragraph can be recognised as Common Equity Tier 1 (CET1) only where they are available to the institution for unrestricted and immediate use to cover risks or losses as soon as these occur.
However, Article 26(1) CRR appears to be silent with regard to the ability of the share premium account to be available to the institution for unrestricted and immediate use to cover risks or losses as soon as these occur in order to qualify as CET1 capital.
In this context, Article 30(b) CRR clarifies that the share premium account qualifies as a CET1 item in accordance with Article 26(1)(b) CRR only to the extent that the related capital instruments qualify as CET1.
In practice, Articles of Association (AoA) of supervised entities may include some provisions governing the possible uses of the share premium account that could prevent its capacity to absorb losses. For example, when share premium account paid can only be used for the matters specified in the related deed (which could be limited to distributions, share buy-backs or other uses unrelated to loss absorption).
In those cases, the share premium account might not be available to absorb losses despite the fact that the related instruments fully qualify as CET1.
The question is whether the share premium account can qualify as CET1 in those cases where the provisions governing its use prevent its capacity to absorb losses, despite the fact that the related instruments fully qualify as CET1.
- Submission date
- Final publishing date
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- Final answer
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No. Share premium accounts that are unable to absorb losses do not qualify as CET1.
As explained in EBA Q&A 2016_2808, the CRR establishes a very close link between capital instruments and the share premium accounts related to these instruments, as illustrated by Article 30 CRR. It is therefore expected that share premium accounts are merely an additional contribution to the instrument with the same quality as the instrument to which they are linked. Any restrictions on share premium accounts are thus not acceptable. This includes, inter alia, any share premium accounts that would not be able to absorb losses as they occur or not rank pari passu among shareholders.
Article 79a CRR provides for a substance over form approach and requires the combined economic effects of all arrangements related to instruments to be compliant with the objective of the CRR. Therefore, when assessing the eligibility of an own funds instrument, any covenant or deed relating to the share premium accounts related to the instrument shall also be taken into account.
- Status
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Final Q&A
Disclaimer
The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.