EBA updates on monitoring of Additional Tier 1 instruments and issues recommendations for ESG-linked capital issuances

The European Banking Authority (EBA) published today its updated Report on the monitoring of Additional Tier 1 (AT1) instruments including an update on the monitoring of the implementation of the EBA’s Opinion on legacy instruments and its considerations on ESG capital bonds. The objective of this update is to further strengthen the robustness and quality of EU institutions’ own funds and eligible liabilities instruments.  

The updates to this Report reflect (i) the amendments to the Capital Requirements Regulation (CRR2), (ii) the monitoring of the implementation of the EBA Opinion on legacy instruments, and (iii) observations on new market trends, such as ESG-linked capital instruments.

Due to the high standardisation of the AT1 issuances, only limited new observations have been added to the Report since its last update. However, in the context of the end of the transitional period for legacy instruments, the EBA draws attention on the need to keep the capital structure simple and avoid additional layers within a capital class that would increase complexity. Further clarification on the implementation of the options in the EBA Opinion on legacy instruments is, therefore, provided in the Report.

In addition, the EBA has identified differences in the clauses of the environmental, social and governance (ESG) issuances made for capital/loss absorbency purposes. In this regard, the EBA is providing best practices or practices that should be avoided for these issuances. The purpose is to give views and recommendations on how ESG capital bonds features are meant to interact with the eligibility criteria for own funds and eligible liabilities instruments, and ultimately to safeguard the quality of the instruments from a prudential perspective.

The EBA will continue its monitoring and include any new observations in the next update of the AT1 report, in particular concerning the monitoring of the implementation of the EBA Opinion on legacy instruments at the end of the grandfathering period and on the development of ESG capital bonds.

Legal basis and background

In accordance with Article 80 of the CRR on the continuing review of the quality of own funds, the ‘EBA shall monitor the quality of own funds and eligible liabilities instruments issued by institutions across the Union and shall notify the Commission immediately where there is significant evidence that those instruments do not meet the respective eligibility criteria set out in this Regulation’.

The CRR lays down eligibility criteria for AT1 instruments (in particular Articles 51 to 55). Those criteria are supplemented by the Commission Delegated Regulation (EU) No 241/2014 (Regulatory Technical Standards (RTS) on own funds).