EBA Response on Reclassification of Grandfathered Own Fund Instruments
EBA published a response to a letter it had received from a law firm (Akin Gump LLP) regarding the case of a reclassification by an institution of some specific grandfathered own funds instruments. EBA also addressed this issue through its Q&A process via the Q&A on Single Rulebook. Q&A 2018_4417 clarifies in more general terms the appropriate prudential treatment for such cases.
In its answer, EBA has concluded that reclassifications of own funds instruments as described—that is, from a grandfathered category to a fully eligible category—although unusual, are not prohibited as such by the Capital Requirements Regulation (CRR). However, the EBA answer recalls that, as explained in the introductory recitals of the CRR (recitals 78 and 119), the general purpose of the grandfathering provisions as they relate to own funds is to ensure an appropriate continuity in the level of own funds, while also ensuring that institutions have sufficient time to meet the new required levels and definitions of own funds and that certain capital instruments that do not comply with the definition of own funds laid down in the CRR are phased out. To the extent that grandfathering allows for deviations from the new criteria on the quality of own funds instruments, those deviations should be limited to the largest extent possible. The possibility for institutions to benefit from a grandfathered treatment should, therefore, be subject to strict conditions.
In cases where institutions operate such reclassifications, very close scrutiny should be exercised by the competent authority on the reasons for such a reclassification. This is particularly recommended if in contexts where no change in the relevant applicable laws or terms and conditions of the instruments has taken place prior to the reclassification, the reclassification has a significant impact on the capital ratios or any forthcoming changes to the CRR and related new grandfathering provisions in relation to eligibility of own funds are likely to come into force.
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Keywords: Europe, EU, Banking, Own Funds Requirements, CRR, Single Rulebook, Q&A, EBA
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