Homework for the upcoming week: EU bank capital rules.

With the EBA and the ECB announcing results of the stress test and the AQR next week, and with feeble banks shivering, you may consider setting aside a couple of hours this week to read the terms and conditions of bank capital instruments. Maybe your investment in capital securities of EU banks is at risk, maybe not.

All I can do is offer some advice and some of the relevant rules: See the list below, which is limited to EU rules (regulations, directives, guidelines, and technical standards only).

  • For instruments issued under the Capital Requirements Directive before 2011, please rely on your national rules, and national implementations of the CRD. The relevant rules under CRD feature in Chapter 2, Section 1: Own funds. Note the trail of changes and amendments of the CRD listed in the section: “Relationship between documents.” This facilitates finding out which rules applied when.
  • Regarding 2011 to 2013, you may want to read the CEBS (later EBA) guidelines for Tier 1 hybrids and for capital of the highest quality – common shares or instruments that are deemed fully equivalent to common shares in terms of their capital quality as regards loss absorption.
    The hybrid guidelines impose stronger loss-absorption rules on Tier 1 hybrids.
    The guidelines for capital of the highest quality anticipate the Basel III definition of capital.
  • Instruments issued after the publication of Basel III (December 2010) may include features that anticipate the entry into force of CRR and CRD IV.
  • Instruments issued after the publication of the proposed Bank Recovery and Resolution Directive (BRRD) in June of 2012, may incorporate features that anticipate bail-in.
  • Regarding bail-in outside Europe, please consider the Basel non-viability press release (PON) of January 2011.
  • In force are currently CRR and CRD IV. With the CRR probably the most relevant regulation: it applies directly to all EU banks. It also sports its own version of the Basel III definition of capital in PART II: Own funds. This may differ from the Basel III own funds definition. For example, the CRR disallows pushers and stoppers, see Article 53.
  • The EBA issued technical standards for own funds, these supplement the CRR.
  • The EBA highlights additional issues in a recent report on Additional Tier 1 instruments.
  • The EBA offers additional help via its Q&A tool.
  • If you wonder where some quirky rules originate from, Basel III has it this F.A.Q. that may clarify.
  • Last but not least: the CRR has detailed and complex grandfathering rules, see Part Ten: Transitional Provisions, Reports, Reviews and Amendments. These rule over instruments issued before 2014.

Happy reading!