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

When should deductions from own funds and eligible liabilities be applied in the context of a liability management exercise without replacement (i.e. a tender offer)? When can the unredeemed part of own funds or eligible liabilities be included in own funds or eligible liabilities again?

Article 77 of Regulation (EU) No 575/2013 (CRR) requires institutions to obtain the prior permission of the competent authority / resolution authority to repurchase AT1, Tier 2 or eligible liabilities instruments. In the case of a liability management exercise without replacement (i.e. a tender offer) after five years, the bank must meet the conditions set in Articles 78(1)(b) or 78a(1)(b) CRR. Articles 28 and 32b of Delegated Regulation (EU) No 241/2014 state that the institution shall deduct the amounts to be repurchased from the institution’s own funds and eligible liabilities instruments where the action is expected to take place with sufficient certainty, and once the prior permission of the competent or the resolution authority has been obtained. In Q&A 2017_3277, the EBA clarified that “for instruments containing call options […], in case of the use of the call, sufficient certainty is deemed to exist only at the time of the announcement of the call […]”.  In Q&A 2023_6791, the EBA clarified that in cases of “repurchase of own funds instruments (liability management exercises notably), under Article 78(1)(a) or 78(4)(d) of the CRR, the authorisation is subject to the condition that the instrument should be replaced before or at the same time as the repurchase” and, thus, “sufficient certainty is deemed to exist when the new issuance is effective […]”. It remains to be clarified when the deduction should be applied in case of a liability management exercise without replacement (i.e. a tender offer) after five years. Additionally, it remains to be clarified in the general case of a liability management exercise (before or after five years and with or without replacement), if and when the unredeemed part of AT1, Tier 2 or eligible liabilities instruments for which the prior permission has been granted could be added back to own funds or eligible liabilities.