EBA · 2015_1846 Archive

Subordinated loans as Additional Tier 1 capital

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
51, 52
Topic
Own funds
Submitted by
Accounting firm
Submitted
2015-02-20
Answer provided by
ESAs (EBA, ESMA, EIOPA)

Question

Is it possible for a (normal) subordinated loan to qualify as Additional Tier 1 capital according to Article 51 of Regulation (EU) No 575/2013 if all conditions according to Article 52 are met?

Background

Usually a company or bank issues a bond or another kind of a hybrid security with debt- and equity-like features to be qualified as Additional Tier 1 (AT1) capital. In terms of a subordinated loan without a global certificate you would normally refer to Articles 61 and 62 of the CRR immediately just because of the wording of these Articles: Article 61 and Article 62 of the CRR refer to 'capital instruments and subordinated loans' whereas Article 51 and 52 of the CRR only refer to 'capital instruments'. Does this mean that subordinated loans can only qualify as Tier 2 capital or is it possible that a 'normal' subordinated loan which is in line with the conditions of Article 52 of the CRR can qualify as AT1 capital as well? In this context it seems to be relevant as well what (which kind of contracts) is covered by the term 'instrument' in the context of Articles 51 and 52 of the CRR. Based on the mere wording of the relevant articles you could argue that Articles 61 and 62 CRR refer to 'capital instruments AND subordinated loans' which must mean vice versa that Articles 51 and 52 of the CRR, which only refer to 'instruments', do not cover subordinated loans. On the other hand the CRR and the conditions for capital instruments are principle based, and thus the form of an instrument should not be relevant for this question. Or do we have to understand the principle based approach as a principle as long as the instrument, covered by AT1 rules, has a nature of a security, like a share, a bond or an obligation?

Answer

A subordinated loan may qualify as part of Additional Tier 1 items under Article 51 of Regulation (EU) No 575/2013 provided that it meets all of the conditions set out under Part Two, Title I, Chapter Three of that Regulation.

Original source: European Banking Authority, Q&A ID 2015_1846

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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