EBA · 2014_986 Final Q&A

Application transitional provisions: Deduction half from Tier 1 and half from Tier 2

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
11, 472, para. 6
Topic
Own funds
Submitted by
Credit institution
Submitted
2014-03-19
Answered
2014-07-11
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

The residual amount of specific items (e.g. point (d) of Article 36(1) CRR) shall be deducted half from Tier 1 items and half from Tier 2 items during transitional provisions (see for example 472 (6) and (11) CRR). Please specify the calculation logic to be considered by CRR users.

Background

For specific items an applicable percentage must be deducted from CET1 capital under the transitional provisions only. The residual amount shall be deducted half from Tier 1 items and half from Tier 2. Against this background, the exact calculation logic is not specified. This might lead to different interpretations when applying the transitional provision in regards to Tier 1 (see example A and B). - Option A: Adjustment to AT1 of 50% (Tier 1 total: 50%) and to T2 of 50%. Here, only AT1 and T2 items are considered. - Option B: Adjustment to CET1 of 25%, to AT1 of 25% (Tier 1 total: 50%) and to T2 of 50%. Here, CET1, AT1 and T2 items are considered. The key question is therefore, whether or not Tier 1 includes CET1 capital.

Answer

Where the residual amount of a deduction or deductions is applied to Tier 1 capital and there is insufficient Additional Tier 1 capital to absorb this amount, then the excess shall be deducted from Common Equity Tier 1 capital in accordance with Article 36(1)(j) of the Regulation (EU) No. 575/2013 (CRR). Additionally, should there be deductions to Tier 2 capital and there is insufficient Tier 2 capital to absorb this amount, then the excess shall be deducted to Additional Tier 1 in accordance with Article 56(e) of the CRR. As referred in the previous paragraph, if there is insufficient Additional Tier 1, these deductions should be deducted from Common Equity Tier 1 capital.

Original source: European Banking Authority, Q&A ID 2014_986

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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