EBA · 2021_6022 Rejected question

Reduction of own funds according to Article 78(1)(a) CRR

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
78, para. 1
Topic
Own funds
Submitted by
Competent authority
Submitted
2021-05-28
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Question

If an institution applies for an own funds reduction with replacement pursuant to Article 78(1)(a) CRR, may such institution include in its own funds at the same time both the replacing instruments and the replaced instruments? Or should a request for a permission under Art 77 CRR be assessed according to Article 78(1)(b) CRR if the institution includes both the replaced and the replacing instruments at any point in time simultaneously in own funds, considering the consequent decrease of own funds that will occur when the replaced instrument is finally called back/repurchased, or redeemed?

Background

According to Article 78(1)(a) CRR the competent authority shall grant the permission for an institution to reduce, call, redeem, repay or repurchase Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments or to reduce, distribute or reclassify related share premium accounts if, before or at the same time as any of the actions referred to in Article 77(1) CRR, the institution replaces the instruments or the related share premium accounts referred to Article 77(1) CRR (the ‘’replaced instrument’’) with own funds instruments of equal or higher quality at terms  that are sustainable for the income capacity of the institution (the ‘’replacing instrument’’).   Some institutions apply to reduce own funds with replacement according to Article 78(1)(a) CRR having already issued the replacing instrument and included it in their own funds so that both the replaced instrument and replacing instrument are included in the own funds. Such inclusion of both replaced and replacing instruments means that once the reduction is performed and the related amount is deducted according to Article 28(2) Commission Delegated Regulation 241/2014, there would be a decrease of the own funds.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2021_6022

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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