Session 1: Own Funds and Disclosure of Own Funds

Transcription

1 Session 1: Own Funds and Disclosure of Own Funds GDLN for Banking Supervisors and Regulators 12 May 2014 Outline Overview Objectives of RTS Definition and criteria of Own Funds Deductions Disclosures 2 1

2 Overall Objectives of RTS on Own Funds Applying Basel III in the EU Capital Requirements Directive Texts CRR/CRD IV EBA Regulatory Technical Standards (RTS) 3 Key objectives Better capital More Capital Avoid Regulatory Arbitrage Harmonisation Uniform Approach Part of the Single Rulebook 4 2

3 What is about? 4 RTS + 1 Implementation TS (ITS) Criteria and Eligibility of Own Funds Disclosure of Own Funds Deductions How to improve quality of capital? Templates for disclosures 5 Key issues addressed in RTS Own Funds Part 1 What constitute capital? e.g. Dividends, redemption Common Equity Tier 1 Features of Own Funds Additional Tier 1 6 3

4 Eligibility Criteria Eligibility and criteria for Common Equity Tier 1 (CET1) capital: in particular foreseeable charges or dividends, features of capital instruments of mutuals, cooperative societies or similar institutions. Eligibility and criteria for Additional Tier 1 (AT1) capital: in particular the form and nature of incentives to redeem and the use of special purpose entities. Deductions from Common Equity Tier 1 capital and from own funds in general: including deductions of capital instruments of financial institutions and insurance/reinsurance undertakings, losses of the current financial year, deferred tax assets, defined benefits pension fund assets, foreseeable tax charges. 7 Dividends Payments Formal Management decision Dividends Distribution deducted from interim or year-end profits. 8 4

5 Role of regulator 1 Regulator should ensure All necessary deductions have been made 2 To interim or final profits Under applicable accounting framework 3 Then regulator permit that the institution includes interim or year-end profits in Common Equity Tier 1 capital. 9 Limitation for redemption Even with contractual or legal provision on redemption Regulators can overrule the redemption and limit further redemption Regulators to assess the bases of limitations on redemption included in the contractual and legal provisions governing the instrument Regulators may require institutions to modify the corresponding contractual provisions For instruments to qualify for CET 1,, the legislation shall enable the institution to limit redemption 10 5

6 Forseeable Tax Charges If tax liabilities in line with accounting framework And Full recognition on balance sheet No additional deductions required Forseeable tax charges already taken into account 11 Deductions of tax charges If tax liabilities not recognised in line with accounting framework (IFRS), Deductions from Common Equity Tier 1 by the estimated amount of current and deferred tax charges not yet recognized in the balance sheet and profit and loss account ie required. 12 6

7 Example of other deductions Deductions from CET 1 Instruments qualify as capital in Company Law and fully included in CET 1 Deductions from AT1 Subordinated instruments absorbing losses on a going-concern basis, including the discretion to cancel coupon payments, shall be deducted from Additional Tier 1 capital 13 RTS on Own Funds Part 2 The objectives of this RTS are to specify: Objective 1 the conditions according to which competent authorities may determine that a type of undertaking recognised under applicable national law qualifies as a mutual, cooperative society, savings institution or similar institution. Objective 2 The draft RTS complement the draft RTS on own funds Part One, in particular in terms of provisions related to mutuals, cooperative societies, savings institutions, or similar institutions. 14 7

8 Deferred redemption or limited redemption For instruments of mutuals, cooperative societies, savings banks or similar institutions, if the refusal by an institution of the redemption of instruments is prohibited under applicable national law: It is appropriate that the provisions governing the instruments give the institution the ability to defer their redemption and limit the amount to be redeemed. It is also appropriate for competent authorities to have the power to limit the redemption of cooperative shares. 15 Shareholders and Members For an institution recognized under applicable national law as a mutual, cooperative society, savings institution or similar institution, it is appropriate in some cases to distinguish between the holders of the institution s Common Equity Tier 1 instruments and the members of such an institution. In some specific jurisdictions in the EU, for example members generally need to hold capital instruments in order to be entitled to a right to dividends, as well as to a right to a part of the profits and reserves. Problem: This may pose a risk to the entity when members use their rights to dividends as well as profits/reserves. 16 8

9 Redemption Features With regard to cooperative institutions, a common feature is in general the ability of members to resign and therefore to require the redemption of the Common Equity Tier 1. That does not prevent a cooperative society from issuing qualifying Common Equity Tier 1 capital instruments for which there is no possibility for the holders to put the instruments back to the institution, provided that these instruments meet the provisions of the RTS. Main objective: Capital base of entity is not eroded by early redemption from members. 17 RTS on Own Funds Part 3 The objectives of this RTS are to define: Objective 1 The deduction of investment holdings (indirect and synthetic): to achieve greater harmonisation and increased conservatism in the way the deductions of investments in financial sector entities and own capital instruments are applied. Objective 2 The criteria on use of broad market indices: to avoid that the interest rate/dividend paid by institutions on floating rate capital instruments increase when the credit standing of the institution decreases (credit sensitive dividend features). 18 9

10 Objective of this RTS: Investment holdings What? This RTS explains what intermediate entities mean for the purpose of deducting holdings in financial sector entities held indirectly through intermediate entities. Example: holdings in mutual funds, investment funds, pension funds which hold capital instruments of financial sector entities or special purpose entities. Approach The RTS details the amount to be deducted from CET1 items in each case. 19 Objective of this RTS: Market indices Use of indices for dividend payments: Key problem Prudential concerns arise, where an institution s own credit standing drives the rates set by market indices which are also used as a reference for the remuneration of Additional Tier 1 and Tier 2 instruments of the institution. Key approach Where the rate is linked to an index, the index should be sufficiently broad to ensure that the institution s credit standing is not driving the rates set by that index

11 Objective of this RTS: Market indices 1 Market indices used to remunerate Additional Tier 1 (AT1) or Tier 2 (T2) instruments. The RTS contains several criteria that need to be fulfilled for indices to be considered as broad market indices. 2 3 The RTS focuses on correlation issues only, meaning that indices shall be sufficiently broad to ensure that the institution s own credit standing is not driving the rates set by that index. An interest rate index shall be deemed sufficiently broad if there are at least six participants or if there are at least four participants who are together representative of the related market. 21 RTS Own Funds Part 4 This RTS deals with dividends multiples. While recognising that institutions can issue instruments with dividend multiples, European co-legislators have introduced a mandate for the EBA re. dividend multiples. Objectives: to ensure that these features are framed in such a way that they do not lead to a disproportionate drag on capital, both in terms of single own funds instruments and total own funds

12 RTS Own Funds Part 4 Key approaches of RTS on multiple dividends and respective instruments. Harmonised criteria for the limitations of distributions on instruments with multiple distributions. Ensuring that the future loss absorbency of CET1 instruments is not compromised by disproportionate distributions constituting a drag on own funds. Only a subset of those instruments could therefore be included in CET1. 23 Disclosure of capital in IFRS Disclosure requirements in IAS 1. IAS 1 Not focus on prudential issues. Not too detailed Areas Capital management by entity Breaches and decisions by entity to meet new requirements. Problems Not suited for all regulatory capital instruments. Not suited for adjustments and deductions for 24 12

13 Objectives of disclosure requirements in ITS Establishing appropriate disclosure requirements to increase transparency regarding the regulatory capital of European institutions. These disclosure requirements are a complement to the strengthening of the quality and quantity of capital. The use of uniform templates will facilitate cross-jurisdictional comparisons. The EBA very closely followed the approach adopted by the BCBS in order to facilitate international comparisons. 25 Disclosure requirements 3 Main Disclosure Templates General own funds disclosure Transitional disclosure template because some adjustments required in RTS are transitional or phased. In their financial statements, a reconciliation of their own funds elements to their regulatory own funds. Consistent with the BCBS reconciliation requirements

14 Other information to disclose Institutions are also required to complete a capital instruments features template or table, which reflects the features of an institution s capital instruments. In order to address the disparity between the data used for the calculation of own funds and the data used in institutions financial statements, it is necessary to also disclose how elements in the financial statements that are used to calculate own funds change when the regulatory scope of consolidation is applied. 27 Timeline The own funds disclosure template will have to be completed by institutions from 1 January 2018 onwards. During the period from 1 January 2014 to 31 December 2017, which covers the phasing in of the regulatory adjustments (deductions and filters), institutions are required to disclose specific information related to components of capital, filters and deductions

15 Close relationship with IFRS The regulatory scope balance sheet shall be at least as detailed as the balance sheet in the financial statements for own funds items, and its items shall be displayed side by side with a clear mapping with the own funds items of the balance sheet in the financial statements. Institutions shall provide qualitative and quantitative information on the differences in own funds items due to the scope and method for consolidation between the two balance sheets. 29 Conclusions Both quantity and quality of own funds are important. To improve quality and quantity, the RTSs list a number of deductions and other requirements. Transparency of capital instruments should be increased by significantly additional disclosures in line with Basel disclosure requirements