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    EBA Report Examines Prudential Treatment of Legacy Instruments in CRR

    July 06, 2022

    The European Banking Authority (EBA) published a report analyzing the implementation of its Opinion on the prudential treatment of legacy instruments across the European Union.

    The report found that both institutions and competent authorities have made significant efforts to implement the EBA Opinion effectively and consistently. The findings show that institutions have made significant efforts to address the issues related to legacy instruments, mainly by calling, redeeming, repurchasing, and buying back such instruments or by amending their terms and conditions; however, for a few instruments, the national transposition of Article 48(7) of the Bank Recovery and Resolution Directive (BRRD) helped mitigate the infection risk. For a limited number of instruments, actions are still ongoing or under consideration, with call options planned to be exercised in the course of 2022 or later. A few instruments will be kept in a lower category of own funds or as eligible liabilities or in the balance sheet as non-regulatory capital. EBA expects that some more actions could be undertaken or announced in the near future. The primary objective of the EBA Opinion has been to address possible challenges in the quality of institutions’ own funds and eligible liabilities posed by the end of the Capital Requirements Regulation (CRR) grandfathering period. 

    The report concludes that, globally, necessary actions have been taken by institutions and competent authorities to exit the Capital Requirements Regulation (CRR or Regulation 575/2013) before the CRR2 amendments grandfathering period in an appropriate manner. As a next step, competent authorities will continue to monitor the residual limited and specific cases where the actions are still in progress or where instruments would be kept in a lower category of own funds or as eligible liabilities, and report to the EBA. EBA expects competent authorities to consistently apply the existing guidance in view of the new grandfathering period generated until June 2025 via more recent amendments to the Capital Requirements Regulation (CRR2). Going forward, EBA will re-assess when time comes the need for additional scrutiny on the stock of CRR2 legacy instruments.

     

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    Keywords: Europe, EU, Banking, Legacy Instruments, CRR, Basel, Regulatory Capital, MREL, BRRD, Grandfathering Period, EBA

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