EBA · 2015_1815 Final Q&A

Reduction of CET1 by absorbing losses which are already accounted as loss brought forward

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
77, 78, para. 1, 1
Topic
Own funds
Submitted by
Competent authority
Submitted
2015-02-10
Answered
2015-06-05
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

Is the prior permission of the supervisor required when an institution reduces its CET1 instruments by absorbing losses which were already accounted for as retained losses (i.e. loss brought forward)?

Background

An institution can decide to allocate what was previously accounted for as retained losses (or loss brought forward) to its CET1. By doing so, the CET1 instruments absorb the losses by means of a write-down of the nominal amount or a reduction of the quantity of instruments. The rationale for Article 77 seems to require the prior permission of the competent authority for any reduction of own funds instruments which is not motivated by losses, as it deteriorates the capital ratios of an institution. On the contrary, using CET1 instruments to absorb the loss brought forward does not reduce the CET1 amount of the institution, as these retained losses were already deducted from CET1 in application of Article 26 CRR. As in this case there is no impact on the solvency situation of the institution, it would be appropriate to not require the prior permission of the supervisor.

Answer

Article 77 (1) (a) of Regulation (EU) No 575/2013 (CRR) requires that an institution shall obtain require the prior permission of the competent authority to 'reduce, redeem or repurchase Common Equity Tier 1 (CET1) instruments issued by the institution in a manner that is permitted under applicable national law'.  Accordingly, any reduction in CET1 instruments, even in cases where the solvency situation of the institution is unaffected by the proposed reduction, shall require the prior permission of the competent authority, which shall be granted in accordance with the conditions specified under Article 78(1) of the CRR.

Original source: European Banking Authority, Q&A ID 2015_1815

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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