EC consultation on potential changes to the Capital Requirements Directive - Hybris bonds
Content
Last October, European Commission published a public consultation on potential changes to the Capital Requirements Directive, that includes a proposal about hybrid capital instruments of banks, with a principle-based approach.
This proposal includes, for example, broader limits for hybrid bonds' issues. In particular, the hybrid instruments that meet the requirements of permanence, flexibility of payments, subordination and loss absorption (as identified in the same proposals of the European Commission) may be accounted in the ‘Tier 1’ capital – the own funds of a credit institution - up to a maximum of 50% of ‘Tier 1’ instruments (including hybrid instruments themselves).
Moreover, the European Commission proposal provides the principle that eligible instruments should not hinder the recapitalisation of the issuer.
Such proposals should be adopted officially in April 2009.
ABI Position
On hybrid capital instruments, ABI welcomes the principles-based approach to regulation proposed by the Commission, but underlines that European harmonisation needs to be ensured. National discretions should therefore be avoided unless they are necessary for achieving the desired objective of an economic level playing field.
ABI considers that the proposed rules to recognize hybrid capital instruments as original own funds of the credit institution duly reflect the main eligibility criteria (i.e. flexibility of payments, permanence, subordination and loss absorption) announced by the Basel Committee on Banking Supervision in a Press Release in 1998 (and that have not been transposed into EU legislation yet).
Moreover, ABI acknowledges the importance for Tier 1 instruments to not hinder the recapitalisation of a company but it is not clear how this could be tested at the time of an issue. Thus, ABI consider that the Committee of European Banking Supervisors (CEBS) should provide some guiding examples of appropriate operational mechanisms to comply with this principle, in order to facilitate the structuring of issues of hybrid bonds.