CEBS has developed a set of 10 criteria for the assessment of capital instruments that may be included in institutions’ original own funds without limit. These criteria - that form the basis of CEBS’s guidelines - stipulate direct issuance of eligible capital and limit their redemption.
The Committee of European Banking Supervisors (CEBS) published its implementation guidelines on capital instruments.
The revised Capital Requirements Directive (CRD) introduces explicit rules for the treatment of instruments eligible as capital and, in particular, requirements for their inclusion in institutions’ original own funds without limit. The amendments will need to be transposed into Member States’ national law by 31 October 2010 and will be applied from 31 December 2010.
On the basis of these provisions, a set of 10 criteria has been developed for the assessment of capital instruments that may be included in original own funds without limit. These criteria form the basis of CEBS’s guidelines.
1. Subscription to the capital instrument shall make the investor a shareholder or other proprietor, or give the investor a deemed equivalent affiliation under national law. The instrument must also be recognized as equity under the relevant accounting standards and insolvency law. The definition of shareholders or other proprietors is determined by the national legal structure of the institution.
2. Capital instruments must be fully paid. When the issuer has provided financing to the shareholder or other proprietor to facilitate the subscription of capital, either directly or indirectly, the instrument cannot be considered as capital for regulatory purposes. The instrument shall ensure an effective permanent supply of capital.
3. To be eligible, capital instruments shall be directly issued.
4. The capital instrument is perpetual and no terms shall enable redemption by the issuer outside liquidation (setting aside discretionary repurchases or other means of effectively reducing capital in a discretionary manner that is allowable under national law). The holder shall not be in a position to require redemption.
5. When there is a right under the law for the holders of shares to return their shares to the issuing institution (in particular as regards cooperative and mutual banks or similar institutions), this right is not considered as a put option under these guidelines. This is under the condition that such a redemption is subject to an approval process which provides the institution with the option of rejecting the holder’s request, specifically with attention to the prudential situation of the institution.
6. Neither the contract nor marketing conditions shall provide any expectation that the capital instrument will be bought-back or redeemed. Buy-backs or redemptions are subject to prior approval by the competent authorities.
7. There is no right for the holders of capital instruments to claim distribution. Non-payment must not trigger the insolvency of the institution.
8. Payments of dividends are paid out of distributable items and are not cumulative. The level of distribution is not in any way tied or linked to the amount paid in at issuance.
9. Capital instruments take the first and proportional shares of any losses pari passu with other capital instruments referred to in Article 57(a). Concerning cooperative and mutual banks or similar institutions, depending on the national law, the shareholder may have a limited access to the reserves since, in the case of redemption or liquidation, he receives only the amount paid for the shares. In other words, the shareholder gives up (some of) his rights to the reserves. The fact that the shareholder has limited access to the reserves does not necessarily mean that he does not share the first losses. This is under the condition that the reserves are not owned by some of the shareholders and not all, and that the limitations relating to the access to reserves are applicable pari passu to all instruments eligible under Article 57(a), so that it does not create privileges.
10. Capital instruments must be pari passu amongst themselves and have the most subordinated claim in liquidation. They are entitled to a claim on the residual assets that is proportional to their share of capital and not to a fixed claim for the nominal amount. Concerning cooperative and mutual banks or similar institutions, a cap on the amount paid is acceptable if it is applicable to all instruments eligible under Article 57(a), so that it does not create privileges.
© CEBS - Committee of European Banking Supervisors
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