Regulatory Alerts2015-09-23
Added · Updated
Q&A on Prior Assessment of AT1 and T2 Instruments
Institutions are not required to submit Additional Tier 1 (AT1) or Tier 2 (T2) instruments for prior supervisory assessment before issuance, a rule applying to both significant institutions under ECB supervision and less significant institutions supervised by DNB. While retrospective disqualification remains possible, the regulator encourages preliminary assessments for new or complex instruments, requiring documentation such as prospectuses, term sheets, and compliance analyses with the CRR and EBA standards. For non-complex follow-up issuances, a simple notification of completion suffices, though institutions must also ensure compliance with resolution authority requirements.
Q&A
Read aloud
Question:
Are institutions required to submit additional Tier 1 (AT1) instruments as referred to in Article 52 of the CRR and Tier 2 (T2) instruments as meant in Article 63 of the CRR for assessment to the supervisory authority before issuing them?
Published: 23 September 2015
Answer:
No, prior assessment of capital instruments for qualification as AT1 or T2 capital is not required. This applies equally to significant institutions (SIs) under direct ECB supervision and to less significant institutions (LSIs) supervised by DNB in cooperation with the ECB.
Instruments may be assessed retrospectively, however. In some cases, the supervisory authority may conclude in retrospect that an institution has incorrectly designated an instrument as own funds, and consequently disqualify it as such.
However, we encourage institutions to apply for a preliminary assessment if they intend to issue a new or more complex AT1 or T2 instrument for the first time or in other exceptional circumstances. We encourage banks to apply for a preliminary assessment in such cases. SIs should contact their Joint Supervisory Team (JST) and LSIs should contact DNB for this purpose. In the case of non-complex or near-identical follow-up issuances, a notification that the transaction has been completed will suffice.
We want to emphasise that a preliminary assessment does not automatically result in formal approval from the supervisory authority, however, as the latter will only inform the institution that the instrument has been assessed, and - in case of a positive assessment - that there is no reason at that point to assume the instrument would not qualify as AT1 or T2 capital. The instrument may still be disqualified in retrospect, however. This also applies to near-identical follow-up issuances that have not been submitted for prior assessment.
If institutions wish to discuss an issuance with the supervisory authority in advance, they are advised to submit the following documentation to enable assessment as to whether the instrument may qualify as AT1 or T2 capital:
a prospectus and a term sheet describing the characteristics of the instrument;
an analysis demonstrating that the instrument complies with the requirements of Part 2 of the CRR and the relevant EBA Regulatory Technical Standards (RTS), specifying for each provision in the prospectus, term sheet or loan agreement, to which CRR/RTS criterion the provision refers and how it complies with that criterion. The analysis should also consider other relevant EBA publications, such as the AT1 monitoring report and its updates, and Q&As;
a description showing that the instrument fits the institution's capital management planning;
if the issuance is related to a buy-back or replacement:
a term sheet referring to the original instrument and the conditions of the instrument to be replaced or bought back, including a description of the purpose of and the envisaged manner in which the buy-back or replacement will take place;
if the initial interest or coupon rate to be paid on the instrument is adjusted periodically (by means of a reset), or if the basis of the interest rate changes from fixed to variable (or vice versa) at a predetermined time:
a description, if possible supplemented by calculations showing that there will be no incentive to redeem when the rate of interest is adjusted;
a description of the treatment of the instrument in the financial reports of the issuing institution and the manner in which the financial reports will disclose information on the instrument;
if the prospectus or the term sheet states that a special-purpose entity (SPV) as referred to in Article 83 of the CRR will be used: a description of the
legal structure of the SPV;
the intra-group instrument, and
a reasoned description of the differences between the intra-group instrument and the external instrument.
Resolution
From a resolution perspective, the instrument should also comply with the requirements set by the competent resolution authority. Institutions are advised to contact the resolution authority if they intend to issue such an instrument.
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