EBA Opinion on Legacy Instruments Monitoring Implementation Overview - Feb 2022 Meeting
The European Banking Authority (EBA) provided an opinion on legacy instruments monitoring at their Feb 2022 meeting. The presentation covers the monitoring in 2021, surveys, letters to competent authorities, and the overview of monitoring results. It discusses calls for input on the implementation of the EBA Opinion, efforts to address infection risk in legacy instruments, responses from competent authorities, and the resolution of legacy instruments through various options.
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EBA Opinion on legacy instruments monitoring of the implementation overview of results SGOF Feb 2022 meeting EBA staff | 22-23 February 2022
EBA Regular Use Contents of this presentation 1. EBA monitoring in 2021 Surveys and Letters 2. Overview of the monitoring Annex - Input from competent authorities 2
EBA Regular Use 1. EBA monitoring in 2021 - Surveys Two calls for collecting input on the implementation of the EBA Opinion (NB: preliminary reflections already collected in Dec 2020 i.e. opinion relevant/not): April 2021 and Aug 2021; Opinion is/isn t relevant; instruments posing infection risk; outstanding amounts; clauses creating infection risk; actions envisaged and planned timing; Legacy instruments posing infection risk, which is expected to be addressed through the transposition of Article 48(7) BRRD, were under the scope of the monitoring exercise and should have been reported accordingly; Data collected in Aug 2021 showed already significant efforts for addressing the infection risk; Majority of institutions applied option (i) (i.e. to call, redeem, repurchase or buyback the instrument) or option (ii) (i.e. to amend the terms and conditions (T&Cs)); But still some uncertainty in particular with instruments where the first two options did not seem possible. EBA Opinion on legacy instruments monitoring of the implementation overview of results 3
EBA Regular Use 1. EBA monitoring in 2021 Letters to CAs In Dec 2021, EBA addressed letters to CAs with institutions under the direct supervisory remit showing outstanding amounts of legacy instruments based on Aug 2021 survey; SSM, AT, DE, DK, FR, IT, NL, PL and PT Response from DK is pending CAs were requested to confirm that: The Opinion has been implemented in a consistent manner; In case legacy instruments are kept in institutions balance sheet as non-regulatory capital (i.e. last resort option), the first two options were not possible; In case legacy instruments have moved into a lower category of capital as fully eligible, compliance with CRR, RTS and EBA s guidance (through EBA monitoring reports and QAs) has been confirmed. EBA Opinion on legacy instruments monitoring of the implementation overview of results 4
EBA Regular Use 2. Overview of the monitoring SSM and NCAs input* Based on the input provided from the 93 instruments reported to EBA: 71 instruments have been already resolved through Option (i), i.e. to call, redeem or buy- back the legacy instrument, for a total amount of 3,135 billion (SSM, AT, FI); 4 instruments have been already resolved through Option (ii), i.e. to amend the T&Cs, for a total amount of 189,61 million (AT, ES), and 5 instruments have been addressed through the transposition of Art. 48(7) BRRD for a total amount of 685,79 million (NL) * The aggregated information presented doesn t include data on PL institutions since no quantitative information has been provided, and on DE LSIs since the conclusion of the assessment is not final and the information provided not complete. EBA Opinion on legacy instruments monitoring of the implementation overview of results 5
EBA Regular Use 2. Overview of the monitoring SSM and NCAs input The use of last resort option has been confirmed in 7 cases: CMMABN CMO CREDIT MUTUEL ARKEA CMNE (FR), Credit Mutuel Arkea (FR), Natixis (FR), Banque Delubac (FR), IFSIC (FR), Volksbank Vorarlberg (AT), Posojilnica Bank eGen (AT) for a total amount of 276,75 million. Still 6 instruments have to be addressed for a total amount of 281,93 million: In 3 cases, a call option in planned to be implemented in the course of 2022 for a total amount of 153,15 million (NL, PT); In 1 case (ES), a call option in planned in 2030 (amount of 32,78 million) In 2 cases (DK, FR) the action is still under consideration/investigation (amount of 96 million) Final treatment not known in some jurisdictions (PL, DE) or might change in the future in others (NL). EBA Opinion on legacy instruments monitoring of the implementation overview of results 6
EBA Regular Use 2. Overview of the monitoring SSM and NCAs input The total amount of the 93 instruments reported is 4.569million : Breakdown of the options* Under For 75 instruments option (i) has been implemented/is planned to be implemented (total amount: 3.321 million); Transposition Art. 48(7) BRRD, 15% consideration/investigation, 2% For 4 instruments option (ii) was implemented (AT, ES) (total amount: 189,61 million); Option (iii), 6% For 7 instruments option (iii) has been implemented (FR, AT) (total amount: 276,75 million); Option (ii), 4% Option (i), 73% 5 instruments have been addressed through the transposition of Art. 48(7) BRRD (NL) (total amount: 685,79 million); Option (i) Option (ii) In 2 cases the action is still under consideration/investigation (DK, FR) (Total amount: 96 million) Option (iii) Transposition Art. 48(7) BRRD Under consideration/investigation *We considered the amounts of the instruments EBA Opinion on legacy instruments monitoring of the implementation overview of results 7
EBA Regular Use 2. Overview of the monitoring Final remarks Significant efforts have been made by institutions and CAs: Please see separate presentation on the transposition of Art 48 (7) BRRD Legacy instruments have been addressed mostly through the use of Option (i) or Option (ii) Transposition of Article 48(7) of BRRD2 has been referred as a solution to infection risk in limited cases, i.e. in particular in NL and DE (LSIs) Still some points of attention remain: AT, FR and PT explicitly confirmed that the Opinion was implemented on a consistent manner by institutions in their direct supervision; Compliance of instruments with CRR, RTS and EBA s guidance is still work in progress in some jurisdictions (FR, PL) or it is seen as under the responsibility of institutions (SSM); Competent authorities will need to keep monitoring the situation for all cases where the actions are still work in progress. EBA Opinion on legacy instruments monitoring of the implementation overview of results 8
EBA Regular Use Responses from competent authorities ANNEX 9
EBA Regular Use Input from competent authorities - SSM Institutions reported 72* instruments posing infection risk for a total amount of 3,756 billion; Majority of instruments were bought back or called (total amount 3,113 billion); For two instruments, option (ii) was applied (i.e. total amount of 188,47 million) For four instruments (approx. total amount of 272 million), institutions suggested to apply the last resort option given that in most cases the call was not possible and the buy-back would have had a significant impact on institutions CET1 capital. Institutions arguments (details in the submitted response) were accepted by the SSM; CMMABN CMO CREDIT MUTUEL ARKEA CMNE (FR), a CET1 legacy instrument with an outstanding amount of 137,000,000 (clauses that contradict the eligibility criterion of subordination); Credit Mutuel Arkea (FR), 30% AT1 capital/70% Tier 2 capital with an outstanding amount of 97,314,000 (clauses that contradict the eligibility criterion of subordination); Natixis (FR), a Tier 2 legacy instrument with an outstanding amount of 35,825,519 (clauses that contradict the eligibility criterion of subordination); Volksbank Vorarlberg (AT), a CET1 legacy instrument with an outstanding amount of 1,568,211 (clauses that contradict the principle of the flexibility of distribution payments) *We didn't consider the two Sander UK plc s instruments for which the amount held outside is equal to 0 EBA Opinion on legacy instruments monitoring of the implementation overview of results 10
EBA Regular Use Input from competent authorities - SSM For two instruments possible call options in the future: ING Bank (NL), a Tier 2 legacy instrument with an outstanding amount of 150 million. The instrument will be called in July 2022; Santander UK (ES), a Tier 2 legacy instrument with an outstanding amount of 32,78 million. A call option in 2030. The instrument is not computed towards consolidated own funds of Banco Santander. JSTs accepted the justification provided by institutions; For legacy instruments that were reclassified as fully eligible, institutions were requested to: Submit a declaration that these instruments do not pose infection risk; Self-assess compliance against not only the CRR and RTS, but also against relevant EBA Q&As and paragraphs of the EBA Report on the monitoring of AT1 issuances; The ECB claims no need for a separate declaration of a competent authority in this regard; The ECB applies a risk-based and proportionate approach where in-depth legal analysis from the horizontal teams are carried out upon request of the relevant line supervisors. EBA Opinion on legacy instruments monitoring of the implementation overview of results 11
EBA Regular Use Input from competent authorities - Austria (AT) All, but one, institutions have addressed the infection risk posed by legacy instruments; Option (i) and option (ii) were followed; FMA confirmed that the EBA Opinion has been implemented in a consistent manner across instruments with the same characteristics; For only one instrument issued by Posojilnica Bank eGen (total amount: 0,921 million) it was not possible to pursue option (i) or option (ii); FMA confirmed that they share and support institution s assessment; The call, redemption, repurchase or buyback of the instrument was not permissible under national civil law; Due to the fact that the Institution is involved in pending legal proceedings with the holder of the legacy instruments concerned, it is expected that an agreement regarding the first two options will not be reached between the institution and the holder of the instrument. Last resort option for this specific instrument will be applied for a period of three years (i.e. from the notice of termination till the actual termination of the instrument). EBA Opinion on legacy instruments monitoring of the implementation overview of results 12
EBA Regular Use Input from competent authorities - Germany (DE) DE originally reported that the EBA Opinion is not relevant for LSIs; DE detected several LSIs legacy instruments with clauses that might create an infection risk due to the eligibility criterion of subordination; The transposition of Article 48(7) BRRD into the German legislation (Sec. 46f (7a) of the Banking Act (KWG)1) has addressed this risk; However, possible ranking issues relating to legacy instruments with regard to their ability to absorb losses in going concern situations have been identified; 11 LSIs with AT1 legacy instruments: 2 LSIs have repaid the grandfathered AT1 instruments in the meantime; 7 LSIs do no longer include the grandfathered AT1 instruments in any own funds (or the MREL-EL) category (NB: DE claims that the EBA Opinion is not relevant for these institutions); 2 LSIs have included the legacy AT1 instruments as fully eligible Tier 2 instruments; EBA Opinion on legacy instruments monitoring of the implementation overview of results 13
EBA Regular Use Input from competent authorities - Germany (DE) 2 LSIs have included the legacy AT1 instruments as fully eligible Tier 2 instruments: Umweltbank AG: Three (3) profit-participation certificates with a total outstanding amount of 16.615.500 EUR; These Tier 2 instruments are also labelled as green issuances; Bordesholmer Sparkasse AG: A silent participation of 281.470,65 EUR The EBA Opinion might be relevant for one institution with a legacy Tier 2 instrument; this institution will be assessed further in case it is subject to an MREL above its own funds requirements; Since the Opinion was considered as non relevant, no confirmation on whether the Opinion has been implemented in a consistent manner by the institutions was given. EBA Opinion on legacy instruments monitoring of the implementation overview of results 14
EBA Regular Use Input from competent authorities - France (FR) ACPR confirmed that for the two LSIs that chose the last resort option, the other two options were not possible (Total amount: approximately 4 million); ACPR confirmed that the Opinion has been implemented in a homogenous and consistent manner by the institutions on the basis of instruments having similar characteristics; On-going investigations on the case of one institution that requested the inclusion of a grandfathered AT1 instrument into the Tier 2 layer, in order to determine whether the instrument fully complies with the requirements for the reclassification in a lower category of prudential own funds (Total amount: 21 million). EBA Opinion on legacy instruments monitoring of the implementation overview of results 15
EBA Regular Use Input from competent authorities - Italy (IT) BdI confirmed that there are no IT LSIs instruments with legacy instruments in their balance sheet. Thus, the remaining questions were not applicable. EBA Opinion on legacy instruments monitoring of the implementation overview of results 16
EBA Regular Use Input from competent authorities - Netherlands (NL) Two LSIs, i.e. Natwest Markets and NIBC Bank N.V., with five legacy instruments in total for a total amount of 685.79 million; None of them is currently recognised as regulatory capital; Instruments with clauses that might create infection risk due to the eligibility criterion of subordination; However, all these cases are considered as addressed due to the transposition of Article 48(7) BRRD into national law provisions; The recent transposition of the BRRD2 into Dutch legislation has eliminated the infection risk (i.e. the amendment of Article 212rf of the Insolvency Act (Faillissementswet) implementing Article 48(7) BRRD2, which provides for a mandatory amendment of the creditor hierarchy in insolvency for capital instruments that do no longer qualify as regulatory capital) Relevant in that respect will be the guidance provided in Q&A 2018_4417 Possible in the future for an institution to seek to classify a legacy instrument (currently kept outside of regulatory capital) as MREL eligible instrument. The details will be assessed if this is requested in practice, mindful that the instrument needs to comply with CRR, RTS and all guidance issued by EBA. EBA Opinion on legacy instruments monitoring of the implementation overview of results 17
EBA Regular Use 2. Input from competent authorities - Poland (PL) With regard to CET1 legacy instruments i.e. membership capital : Currently 14 cooperative banks have not changed their AoA to make their CET1 instruments CRR compliant, but they are in various stages of the process; With regard to AT1 legacy instruments. Ten institutions had grandfathered AT1 instruments. Since the beginning of 2022: One of them has excluded it from its regulatory capital; 7 banks have reclassified those instruments as Tier 2 capital; 2 banks have recognized them partially as Tier 2 capital and partially as MREL; Only two series of notes issued by one bank have their maturity dates in 2030, all the rest have their maturity dates between 2024 and 2025. No information on the amounts and number of instruments (only assessment that they are no material); Any assessment on whether the legacy instruments might pose infection risk? Assessment of instruments compliance with the CRR, RTS and EBA guidance has not been performed yet; No confirmation from Polish FSA on whether the Opinion has been implemented in a consistent manner by the institutions, especially for instruments with similar characteristics. EBA Opinion on legacy instruments monitoring of the implementation overview of results 18
EBA Regular Use 2. Input from competent authorities - Portugal (PT) Two LSIs under the scope of the Opinion i.e. Cr dito Agr cola M tuo ( SICAM ) and Caixa de Cr dito Agr cola M tuo de Leiria, CRL ( CCAM Leiria ) for a total amount of 3.15 million not yet resolved; SICAM managed to redeem 40% of the legacy instrument and the remaining part will be redeemed in H1 2022; CCAM Leiria originally opted for the last resort option, but the supervisory dialogue on the basis of the EBA Opinion managed to push the institution into redemption by Nov 2022 (with a three stages plan of redemption); Bank of Portugal confirms that the Opinion has been implemented in a consistent manner by Portuguese institutions. EBA Opinion on legacy instruments monitoring of the implementation overview of results 19
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