EBA published the fourth report on the monitoring of additional tier 1 (AT1) capital instruments. The updates to this report reflect the amendments to the Capital Requirements Regulation (CRR), the monitoring of the implementation of the EBA opinion on legacy instruments, and observations on new market trends, such as environmental, social, and governance (ESG)-linked capital instruments. The report is intended to inform external stakeholders about the continuing work of EBA in terms of monitoring the issuance of AT1 capital instruments and to present the results of this monitoring.
EBA has focused its work primarily on the assessment of selected AT1 issuances. The terms and conditions of these selected issuances are assessed against the regulatory provisions to identify provisions that EBA would recommend to implement and, in contrast, recommend avoiding. Due to the high standardization of the AT1 issuances, only limited new observations have been added to the report since its last update. The observations are linked to some updates made necessary, for example, by the changes in the Level 1 text, such as the amended eligibility criteria for AT1 and Tier 2 instruments. However, in the context of the end of the transitional period for legacy instruments, EBA draws attention to the need to keep the capital structure simple and avoid additional layers within a capital class that would increase complexity. EBA expects that forthcoming issuances will continue to retain a high level of standardization. Further clarification on the implementation of options in the EBA opinion on legacy instruments is, therefore, provided in the report.
The report also provides an overview of the identified risks and identifies differences of clauses based on a larger set of regulatory ESG transactions in comparison to the total loss-absorbing capacity (TLAC) and minimum requirement for own funds and eligible liabilities (MREL) monitoring report. The report discusses policy observations on how the clauses used for ESG issuances and the eligibility criteria for own funds and eligible liabilities instruments interact, with the ultimate aim of identifying best practices or practices/clauses that should be avoided. Therefore, the analysis is not meant to address potential compliance issues of ESG bonds with ESG requirements, but it is aimed at clarifying the extent to which some provisions included in ESG bonds may raise regulatory concerns in the context of the eligibility criteria for own funds and liabilities instruments. During the monitoring exercise, EBA has focused its work on the assessment of selected ESG own funds and TLAC and MREL-eligible liabilities instruments. EBA will continue its monitoring and include any new observations in the next update of the AT1 report, in particular on 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.
Keywords: Europe, EU, Banking, CRR, Basel, Additional Tier 1, ESG, Regulatory Capital, Green Bonds, TLAC, MREL, Sustainable Finance, EBA
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