Circular of the Resolution College of the National Bank of Belgium regarding the granting of authorization for the reduction of eligible commitment instruments

NBB_2021_02 – 15 January 2021 Circular – Page 1/6 boulevard de Berlaimont 14 – BE-1000 Brussels tel. +32 2 221 34 35 company number: 0203.201.340 RPM Brussels www.bnb.be

Circular Brussels, 15 January 2021 Reference: NBB_2021_02 your contact: Bujar Behramaj tel. +32 2 221 34 35 Bujar.behramaj@nbb.be

Circular of the Resolution College of the National Bank of Belgium regarding the granting of authorization for the reduction of eligible commitment instruments

Summary/Objectives Pursuant to Article 78bis of Regulation (EU) No 575/20131 ("CRR"), introduced by Article 1, paragraph 38, of Regulation (EU) No 2019/8762, the resolution authority may authorize in advance establishments under its competence to redeem or repurchase eligible commitment instruments before their contractual maturity date. In this circular, the resolution authority specifies the conditions and application procedure, including deadlines and information requirements.

Madam, Sir,

The CRR provides that establishments must obtain prior authorization from the competent resolution authority to reduce eligible commitment instruments. The conditions for granting such authorization to establishments by a resolution authority are described in Article 78bis, paragraph 1, of the CRR. By this circular, the resolution authority specifies the conditions and application procedure for reducing eligible commitment instruments for establishments under its competence.

1 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012. 2 Regulation (EU) No 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, and reporting and disclosure requirements, and amending Regulation (EU) No 648/2012.

Circular – Page 2/6 NBB_2021_02 – 15 January 2021

(a) Scope This circular applies to credit institutions and investment firms under Belgian law, within the meaning of Article 1, paragraph 3, of the Law of 25 April 20143, which do not fall under the competence of the Single Resolution Board pursuant to Article 7, paragraphs 2, 4, and 5, of Regulation (EU) No 806/20144.

(b) Material scope The prior authorization for the reduction of eligible commitment instruments is limited to eligible commitment instruments within the meaning of Article 72ter of the CRR for which an application, pursuant to Article 77, paragraph 2, of the CRR, must be submitted. For this reason, applications relating to own-fund instruments falling under Article 77, paragraph 1, of the CRR, that is to say instruments forming part of Common Equity Tier 1 capital, Additional Tier 1 capital instruments, and Tier 2 capital instruments, are excluded from the scope of this circular.

(c) Authorization for the reduction of eligible commitment instruments (i) The resolution authority grants an ad hoc authorization to redeem or repurchase eligible commitment instruments when one of the following conditions of Article 78bis, paragraph 1, first subparagraph, points (a) to (c), of the CRR is met: a) by the latest date of one of the operations referred to in Article 77, paragraph 2, of the CRR, the establishment replaces the eligible commitment instruments with own-fund instruments or eligible commitment instruments of equal or higher quality, under viable terms taking into account the establishment's potential income. "Viable taking into account the potential income of the establishment" pursuant to point (a) means that the profitability of the establishment, as assessed by the resolution authority, remains sound or is not significantly negatively influenced after the replacement of instruments with own-fund instruments or eligible commitment instruments of equal or higher quality on that date and for the foreseeable future. The resolution authority takes into account, during its assessment, the profitability of the establishment in stressed situations. b) the establishment has demonstrated, to the satisfaction of the resolution authority, that after the operation referred to in Article 77, paragraph 2, of the CRR, its own funds and eligible liabilities would exceed the own funds and eligible liabilities requirements provided for in the CRR and in Directives 2013/36/EU and 2014/59/EU, by a margin that the resolution authority, in agreement with the competent authority, deems necessary. The establishment is required, pursuant to point (b), to demonstrate that after the operation referred to, its own funds and eligible liabilities would exceed (i) the own funds requirements established by the competent authority and (ii) the minimum own funds and eligible liabilities requirements ("MREL requirement") established by the resolution authority, by a margin that the resolution authority deems necessary. The resolution authority sets the margin in consultation with the competent authority (see point (g));

3 Law of 25 April 2014 on the status and supervision of credit institutions and investment firms. Regarding investment firms, the application of the circular is limited to investment firms which, pursuant to Article 499, paragraph 2, of the Law of 25 April 2014, have a capital requirement of 730,000 euros. 4 Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund, and amending Regulation (EU) No 1093/2010.

NBB_2021_02 – 15 January 2021 Circular – Page 3/6 c) the establishment has demonstrated, to the satisfaction of the resolution authority, that the partial or total replacement of eligible liabilities with own-fund instruments is necessary to ensure compliance with the own funds requirements provided for in the CRR and in Directive 2013/36/EU to continue benefiting from the authorization. The establishment is required to demonstrate, to the satisfaction of the resolution authority, that the replacement of eligible liabilities with own-fund instruments is necessary to ensure compliance with the applicable own funds requirements to continue benefiting from the authorization.

(ii) Article 78bis, paragraph 1, second subparagraph, of the CRR allows the resolution authority to grant a general authorization under the conditions described below. To apply for a prior general authorization under Article 78bis, paragraph 1, second subparagraph, of the CRR, the establishment concerned must provide sufficient guarantees regarding its ability to conduct its activities with own funds and eligible liabilities exceeding the applicable own funds requirements and the MREL requirement. Where applicable, the resolution authority, after consulting the competent authority, may grant the establishment concerned a prior general authorization to redeem or repurchase eligible commitment instruments, subject to compliance with criteria aimed at ensuring that such future operations will comply with the conditions set out in points (a) and (b) of Article 78bis, paragraph 1, of the CRR, as specified in more detail in this circular. The resolution authority always grants this prior general authorization for a fixed period not exceeding one year, from the date of notification of the decision. The resolution authority may extend the duration of the general authorization at the request of the establishment (see point (e) below). The prior general authorization is granted up to a predetermined amount, which is proposed by the establishment and approved by the resolution authority. The determined amount may however not exceed 3% of the total outstanding amount of eligible commitment instruments. The resolution authority may withdraw the prior general authorization at any time when an establishment contravenes one of the criteria set for this authorization. Establishments that have obtained a general authorization are required to inform the resolution authority of the risks to which they are exposed and which affect compliance with the conditions set out in Article 78bis, paragraph 1, second subparagraph, of the CRR during the period for which the authorization was granted.

(d) Communication of the authorization for the reduction of eligible commitment instruments The redemption or repurchase of eligible commitment instruments is not communicated to the holders of the instruments before the establishment has obtained the prior authorization of the resolution authority. When there is sufficient assurance that the aforementioned operations can take place and after the prior authorization of the resolution authority has been obtained, the establishment concerned deducts the amounts to be redeemed or repurchased from eligible liabilities before the envisaged operations actually take place. The existence of "sufficient assurance" is presumed in particular when the establishment concerned has publicly communicated its intention to redeem or repurchase the eligible commitment instruments. In the case of a prior general authorization under Article 78bis, paragraph 1, second subparagraph, of the CRR, the predetermined amount for which the resolution authority has granted its authorization is deducted at the moment this authorization is granted.

Circular – Page 4/6 NBB_2021_02 – 15 January 2021 The provisions above apply, where applicable, at the consolidated, sub-consolidated, and individual level of the MREL requirement.

(e) Application for authorization for the reduction of eligible commitment instruments To demonstrate compliance with the conditions set out in point (c), the application must be accompanied by at least the following information: i. the legal basis of the application (Article 78bis, paragraph 1, first subparagraph, point (a), (b), or (c), or Article 78bis, paragraph 1, second subparagraph, of the CRR); ii. a complete explanation of the reasons why one of the operations referred to in Article 78bis of the CRR is carried out; iii. information on own funds requirements and own funds buffers as well as on the (internal) MREL requirement (expressed in TREA and LRE); iv. the level and composition of own funds and eligible liabilities held to ensure compliance with the requirements, both before and after the execution of the envisaged operation, for a period of at least three years. This includes an analysis of the impact of the envisaged operation for which authorization is requested, and of any other operation for which an authorization requirement is required and that the establishment aims to carry out within a three-year period, on the establishment's compliance with its MREL requirement; v. an assessment of the risks to which the establishment is or may be exposed and of whether the level of own funds and eligible liabilities ensures appropriate coverage of these risks; vi. for an application for authorization pursuant to Article 78bis, paragraph 1, first subparagraph, point (a), of the CRR:

• the identification of the instruments (ISIN code, brief description of the type of instrument, and issuance date);
• information on the residual maturity of the instruments to be replaced and the maturity of the replacement instruments;
• the rank in the creditor hierarchy of these instruments;
• the costs of the replacement instruments;
• the planned time of issuance of the replacement instruments; and
• the impact on the sustainability of the establishment's ability to generate income; vii. for an application for authorization pursuant to Article 78bis, paragraph 1, first subparagraph, point (c), of the CRR: a complete explanation of the reasons why the partial or total replacement of eligible commitment instruments with own-fund instruments is necessary to ensure compliance with the own funds requirements provided for to continue benefiting from the authorization; viii. for a general authorization application pursuant to Article 78bis, paragraph 1, second subparagraph, of the CRR: the total outstanding amount of (i) each issuance, (ii) eligible liabilities, including eligible liabilities that meet the conditions of Article 72ter, paragraph 2, point (d), of the CRR or Article 88bis of the CRR. The foregoing is without prejudice to the right of the resolution authority to request any other information it deems useful to assess whether it is appropriate to grant an authorization pursuant to Article 78bis, paragraph 1, of the CRR.

NBB_2021_02 – 15 January 2021 Circular – Page 5/6 The resolution authority may grant a derogation for some of the above information requirements if it already possesses the necessary information.

(f) Consultation of the competent authority The resolution authority submits the complete application for authorization, including the information referred to in point (e), to the competent authority, where applicable. When a general authorization is requested, the resolution authority launches the consultation of the competent authority at the same time and sets, in collaboration with the competent authority, the deadline necessary for the competent authority to respond to the consultation. When an authorization is requested pursuant to Article 78bis, paragraph 1, first subparagraph, point (b), of the CRR, the resolution authority determines the required "margin" in agreement with the competent authority. The resolution authority immediately informs the competent authority of the decision it has taken regarding the authorization. The resolution authority informs the competent authority of the withdrawal of the prior general authorization if an establishment contravenes one of the criteria set for the authorization.

(g) Chronological procedure and form of the application to be submitted by the establishment The resolution authority is informed in writing of each application for authorization for the reduction of eligible commitment instruments pursuant to Article 78bis, paragraph 1, of the CRR. A complete application is submitted for this purpose at least four months before the date on which the establishment intends to communicate to the holders of the instruments the operation for which authorization is requested. The resolution authority may, in exceptional circumstances and on an individual basis, allow the application to be submitted within a period shorter than four months. The resolution authority processes each application within the applicable timeframe and takes into account, for this purpose, any new information it receives within the timeframe, when it becomes available and when it deems this information material. The resolution authority does not commence processing the application until it has all the necessary information mentioned in point (e). Each application must be addressed to the resolution authority indicating the type of authorization requested. The application must be sent by registered mail to the Governor, in his capacity as President of the Resolution College, at the postal address "boulevard de Berlaimont 14, 1000 Brussels, Belgium" and a copy of this application must be sent to the electronic address resolutioncell@nbb.be.

(h) Entry into force of the circular Article 78bis of the CRR entered into force on 27 June 2019. This circular enters into force from the date of its publication. From the date of entry into force of this circular, all establishments falling within the personal scope are required to meet the conditions set out in this circular to apply for authorization to redeem or repurchase eligible commitment instruments before their contractual maturity date.

Circular – Page 6/6 NBB_2021_02 – 15 January 2021 Article 78bis, paragraph 3, point (c), of the CRR provides for the EBA to adopt regulatory technical standards for the cooperation procedure between the competent authority and the resolution authority, the procedure, including deadlines and information requirements, relating to the granting of prior authorization, and the meaning of the expression "viable taking into account the potential income of the establishment". The adoption of the regulatory technical standards in a delegated regulation by the European Commission will render this circular obsolete, depriving it of its effect.

Please accept, Madam, Sir, the assurance of my distinguished consideration.

Pierre Wunsch President of the Resolution College