EBA · 2014_1220 Final Q&A

Own Funds - Subordinated loans as Tier 2 instruments

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
63, para. g
Topic
Own funds
Submitted by
Competent authority
Submitted
2014-05-20
Answered
2014-08-29
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Our interpretation of Article 63 (g) of the Capital Requirements Regulation (Regulation 575/2013 is that subordinated loans which are perpetual (i.e. do not have a maturity date) would also qualify as Tier 2 instruments under article 63 (g) of the CRR, given that the original maturity would exceed five years (i.e. it would be for an indefinite period). Do you agree with our interpretation? Or is it only subordinated loans with a fixed redemption date (and whose original maturity is of at least five years) which should be recognised as Tier 2 instruments?

Background

We refer to Article 63 (g) of the Capital Requirements Regulation (Regulation 575/2013 of the European Parliament and of the Council of 26 June 2013 – the CRR) and would be grateful to have your assistance. Article 63 (g) states: “Capital instruments and subordinated loans shall qualify as Tier 2 instruments provided that the following conditions are met: (g) the instruments or subordinated loans, as applicable, have an original maturity of at least five years;” Our interpretation of the above provision is that subordinated loans which are perpetual (i.e. do not have a maturity date) would also qualify as Tier 2 instruments under article 63 (g) of the CRR, given that the original maturity would exceed five years (i.e. it would be for an indefinite period). Do you agree with our interpretation? Or is it only subordinated loans with a fixed redemption date (and whose original maturity is of at least five years) which should be recognised as Tier 2 instruments?

Answer

Article 63(g) of Regulation (EU) No. 575/2013 requires that Tier 2 instruments " have an original maturity of at least five years  ". However, economically speaking, a true perpetual instrument is an instrument with an infinite original maturity. Subordinated loans that are perpetual would exceed and therefore fulfil the criteria to be Tier 2 instruments as their original maturity would exceed 5 years. There is no requirement that Tier 2 instruments must have a fixed redemption date.

Original source: European Banking Authority, Q&A ID 2014_1220

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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