EBA · 2013_21 Final Q&A

Deferral of Tier 2 coupons

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
52
Topic
Own funds
Submitted by
Competent authority
Submitted
2013-07-03
Answered
2013-10-31
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Can Tier 2 instruments include terms according to which coupons would be mandatorily deferred or cancelled if coupons were not paid on Additional Tier 1 instruments?

Background

Some existing Tier 2 instruments include such terms. Institutions may therefore raise the issue of consistent treatment. In addition, coupons deferral for Tier 2 instruments may become more common for ratings purposes as certain rating agencies may give more equity credit for Tier 2 instruments with coupons deferral.

Answer

If Tier 2 instruments include such terms, this would undermine coupon flexibility on Additional Tier 1 instruments (as a decision to cancel Additional Tier 1 coupons would automatically lead to the deferral or cancellation of coupons on Tier 2 instruments). The criterion referred to in Article 52 (1) (l) (v) of Regulation (EU) No 575/2013 (CRR), which requires that "the cancellation of distributions imposes no restrictions on the institution" would then not be met by outstanding Additional Tier 1 instruments of the institution. Those instruments would then have to be disqualified from regulatory Tier 1 capital, although Tier 2 instruments including the above mentioned terms would themselves be eligible as regulatory Tier 2 capital.

Original source: European Banking Authority, Q&A ID 2013_21

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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