ECB and EBA Responded to EU Commission Call for Advice
During the past month, European Central Bank (ECB) and European Banking Authority (EBA) responded to EU Commission Call For Advice ('CfA') on the EU macroprudential framework review of the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD).
It is notable that EBA seems more conservative in its views by proposing only minor changes compared to ECB opinion. EBA suggests to analyze the finalized Basel III framework and its interaction with e.g. the resolution requirements in more detail before amending to the current frameworks.
EBA proposes no changes at all concerning AT1 instruments whereas:
- Firstly, ECB proposed reviewing the CRR definition of "distributable items" to ensure that only profitable banks or banks with positive retained earnings could pay AT1 coupons or CET1 dividend payments.
- Secondly, ECB proposed to improve the loss absorption by requiring AT1 classification as equity and removing the need for an "obsolete" trigger at the 5.125% CET1 level. This might have an impact on the tax treatment of AT1 coupons, depending on the implementation.
- Thirdly, ECB calls for improving the permanence and adding more rigidity to the current AT1 regime by requiring calls to be enforced "only if replaced with a CET1 instrument or a cheaper AT1 instrument". This would limit the flexibility of repayment options of issuers in future.
EBA advocates establishing a floor method for setting O-SII buffer rates in the EU. This would protect against under-calibration and promotes financial harmonization. However, since O-SII buffers are not releasable and may decrease the usability of releasable buffers, ECB is not supporting the extension of leverage buffers to O-SII buffers at this time.
Both institutions think that a more significant amount of releasable capital buffers, such as a releasable capital conservation buffer (CCoB), a releasable countercyclical capital buffer (CCyB), and a releasable systemic risk buffer (SyRB) have to be applied. In addition, EBA states that the capital conservation buffer (CCoB) has to be higher than 2.5% when facing increased environmental risks.
Both institutions suggest enhancing the CCyB framework's flexibility and effectiveness by releasing it during times of stress and activating it more appropriately during the build-up phase.
One Side Ideas
EBA considers it too early to incorporate new macroeconomic tools concerning the systematic aspects of environmental risks, crypto assets and cyber security.
ECB is willing to improve information exchange between resolution, competent and designated authorities amidst the increased complexity of the capital framework. Specifically, the EU Commission should determine whether the leverage ratio and MREL requirements impede buffer usability.
Published on 13.07.2022
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