EBA · 2018_4145 Rejected question

Non-CET1 Instruments absorbing losses at the same time as CET1 instruments

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
28, para. 1
Topic
Own funds
Submitted by
Investment firm
Submitted
2018-07-19
Browse ECB SSM Register → More Q&As on this regulation →

Question

Article 28(1)(i) requires that "(i) compared to all the capital instruments issued by the institution, the instruments absorb the first and proportionately greatest share of losses as they occur, and each instrument absorbs losses to the same degree as all other Common Equity Tier 1 instruments;". Would it be permitted to have a non-CET1 instrument that absorbs losses at the same time as a proposed CET1 instrument, as long as they both absorbed losses (joint) first? And would it be permitted for a non-CET1 instrument to absorb losses to the same proportion as a proposed CET1 instrument, as long as they were both absorbing the same proportionate greatest share?

Background

It makes logical and practical sense that losses should be absorbed by the most loss absorbing form of capital first (i.e. CET1), and that this most junior layer of capital should absorb the greatest proportion of those losses. However it appears unclear whether it is permitted for a non-CET1 instrument to share those losses at both the same time (joint first) and in the same proportion (jointly greatest). This has relevance in the structuring of new non-CET1 instruments that could be used to reduce the losses that fall on CET1 instrument, by sharing in them simultaneously. Thus for any absolute quantum of losses, some would be diverted to a non-CET1 instrument.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2018_4145

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.

Similar Q&As

Eligibility of capital instruments for classification as Common Equity Tier 1 instruments when the instruments are supplemented by a contractual obligation of the majority-shareholder to pay a fixed yearly compensation to the minority shareholders

Answered 2014-05-16

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

Answered 2015-06-05

Ability of the Share Premium to absorb losses

Answered 2024-01-12

Own funds – Share premium accounts

Answered 2015-11-06

CET1 Instruments

Answered 2018-04-27

More Q&As on this topic

C01.00 - CIU deduction from own funds

Answered 2025-03-21

4.0 Reporting Framework - COREP_OF C02 Template

Answered 2025-03-21

Direct contributions to reserves from shareholders

Answered 2025-02-07

Permission to reduce AT1, Tier 2 or eligible liabilities instruments and deduction rules in the context of a liability management exercise without replacement.

Answered 2024-04-05

Treasury shares – how to report them in Own Funds and in the NSFR

Answered 2024-02-23

📋 Track EU financial regulation continuously

Forseti monitors EU financial regulation and delivers personalised alerts anchored to verified official sources.

Start free trial → Learn more

14-day free trial. No credit card required.