Mutual Capital Instruments

Similar documents
Common Equity Tier 1 Compliance template

PRA RULEBOOK: CRR FIRMS: DEFINITION OF CAPITAL AMENDMENT INSTRUMENT 2016

Members Shares in Co-operative Entities and Similar Instruments

IFRIC Interpretation 2 Members Shares in Co-operative Entities and Similar Instruments

Members Shares in Co-operative Entities and Similar Instruments

ONLY THE HEBREW VERSION IS BINDING

Demonstrating the Case for Proportionality: Cooperative Banks

Guideline. Capital Adequacy Requirements (CAR) Definition of Capital. Effective Date: November 2018

Guideline. Capital Adequacy Requirements (CAR) Definition of Capital. Effective Date: November 2016 / January

of which : Shortfall in the equity capital of majority owned financial entities which have not been consolidated

Capital Adequacy Framework (Internal Models Based Approach)

Implementation Guidelines on instruments referred to in Article 57(a) of the CRD -CP 33

Capital Adequacy Framework

Modernizing Ontario s Credit Union Legislative Framework

MODULE 6. Guidance to completing the Balance Sheet module of BSL/2

11 July EBA Standardised templates for Additional Tier 1 instruments - DRAFT

Implementation Guidelines regarding. Instruments referred to in Article 57(a) of Directive 2006/48/EC recast

EBA standardised templates for Additional Tier 1 (AT1) instruments Final

17 December Consultation Paper on Implementation Guidelines regarding. Instruments referred to in Article 57(a) of Directive 2006/48/EC recast

FORM SR-2A (extract): CAPITAL DEFINITION (CET1, ADDITIONAL TIER 1, TIER 2, TOTAL CAPITAL, MEMORANDUM ITEMS) COMPLETION GUIDANCE

Official Journal of the European Union. (Non-legislative acts) REGULATIONS

Minimum Capital Test For Federally Regulated Property and Casualty Insurance Companies

ECB-PUBLIC. Dexia Crédit Local S.A. 1, passerelle des Reflets Tour Dexia La Défense La Défense Cedex FRANCE

IFRIC DRAFT INTERPRETATION D8

(Text with EEA relevance)

Basel Committee on Banking Supervision. Basel III definition of capital - Frequently asked questions

Solvency ii Association G Street NW Suite 800 Washington, DC USA Tel:

Liability or equity? A practical guide to the classification of financial instruments under IAS 32 March 2013

Minimum Capital Test Guideline for Property and Casualty Insurance Companies

June 2018 The Bank of England s approach to setting a minimum requirement for own funds and eligible liabilities (MREL)

Overview of the post-consultation revisions to the TLAC Principles and Term Sheet

Session 1: Own Funds and Disclosure of Own Funds

CAPITAL ADEQUACY GUIDELINE. Life and Health Insurance

Hybrid Tier Is Evolution: From CRD I to CRD IV / CRR. Federico Ravera Head of Strategic Portfolio, Group Finance

U.S. Implementation of Basel III: Current Developments

The FRB s LTD, TLAC and Clean Holding Company Final Rules, Funding and European TLAC/MREL Developments

Allied Irish Banks, p.l.c. comments on the Proposal for a common EU definition of Tier 1 hybrids

EBA/CP/2012/02 CONSULTATION PAPER ON DRAFT REGULATORY TECHNICAL STANDARDS ON OWN FUNDS POSITION PAPER SUBMITTED BY RAIFFEISEN BANKING GROUP AUSTRIA

WEST BROMWICH BUILDING SOCIETY PLANNED LIABILITY MANAGEMENT EXERCISE

The Impact of Basel III on Capital Instruments

HSBC Holdings plc. (a company incorporated with limited liability in England with registered number ) as Issuer

Basel Committee on Banking Supervision. Consultative Document. TLAC Holdings. Issued for comment by 12 February 2016

Non-preferred senior debt in Spain

AFME Position Paper CRR2 Own Funds: Minority Interests and Resolution May 2017

VAN DE PUT & CO BALANCE SHEET BALANCE SHEET ANNEX 6 ANNEX 6 NOTE Private Bankers in EUR thousands CODES in EUR thousands ROW

Executive Summary. Volume 2: Islamic Banks. Central Bank of Bahrain Rulebook. MODULE CA: Capital Adequacy CHAPTER CA-A: Introduction

APPLICATION OF THE MINIMUM REQUIREMENT FOR OWN FUNDS AND ELIGIBLE LIABILITIES (MREL) Bank Resolution and Recovery Directive 2014/59/EU

Defining Hybrid Capital

BRRD The UK s Approach to MREL

Official Journal of the European Union

6921/1/18 REV 1 CS/VS/AR/CE/mf 1 DGG 1B

COMMISSION DELEGATED REGULATION (EU) No /.. of

Total Loss-absorbing Capacity (TLAC) Term Sheet

ANNEX I. REPORTING ON FUNDING PLANS Table of Contents

Public consultation. on a draft ECB Guide on options and discretions available in Union law

Capital Requirements Directive IV Framework Capital and Capital Adequacy. Allen & Overy Client Briefing Paper 2 January

The Bank of England s approach to setting a minimum requirement for own funds and eligible liabilities (MREL)

Implementation Guidelines for. Hybrid Capital Instruments

Regulatory Capital. Contents. Introduction

RS Official Gazette, No 82/2017

GUERNSEY FINANCIAL SERVICES COMMISSION ISLE OF MAN FINANCIAL SUPERVISION COMMISSION JERSEY FINANCIAL SERVICES COMMISSION

Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation

Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions

Community Trust Company Basel III Pillar 3 Disclosures March 31, 2017

Final Draft Regulatory Technical Standards

COMMISSION DELEGATED REGULATION (EU) No /.. of

ECB Guide on options and discretions available in Union law. Consolidated version

Financial Instruments: Presentation

Supervisory Statement SS7/13. CRD IV and capital. December 2013

EBA/RTS/2013/07 05 December EBA FINAL draft Regulatory Technical Standards

Pillar 3 Disclosure Index BNG Bank 2016 BANK

Delta Lloyd Bank NV. Pillar 3 Report Delta Lloyd Bank NV Pillar 3 Report

Appendix B Nordea Bank Danmark

SIAM COMMERCIAL BANK

Safe to Fail? Client Alert December 5, 2014

The IFRS for SMEs Topic 2.1(b) Section 12 Other Fin. Inst. Issues Section 22 Liabilities and Equity Michael Wells

Resolution Regimes: FSB s Key Attributes, TLAC & EU s MREL. Seminar on Crisis Management and Bank Resolution

Defining Hybrid Capital

HSBC Bank plc. Pillar 3 Disclosures at 31 December 2017

Public hearing EBA Draft RTS on the methods of prudential consolidation under Article 18 of the CRR. London, 22 January 2018

Product supplement D Registration Statement No To prospectus dated July 31, 2015,

Sr. No. 1 Issuer Axis Bank Ltd. 2 Unique identifier ISIN: INE238A01026

EBA/CP/2013/ Consultation Paper

Lloyds TSB. Lloyds TSB Bank plc. (incorporated with limited liability in England and Wales with registered number 2065)

The Impending Review of the European Resolution Framework


Basel, CRD, CEBS and FSA: the changing landscape of regulatory capital rules and the. impact on Tier 1 and Tier 2 capital.

CAPITAL REQUIREMENTS DIRECTIVE (DISAPPLICATION) INSTRUMENT 2013

OWN FUNDS ORIGINAL OWN FUNDS PAID UP CAPITAL

Pillar III Disclosures June 2017

BRFkredit a/s ANNEX I Balance Sheet Reconciliation Methodology Disclosure according to article 437 of the Capital Requirements Regulation

Interim Financial Report

Consultation Paper. Draft Regulatory Technical Standards

This guidance is relevant to firms as defined in PS11/18 Resolution planning: MREL reporting ( reported entities ).

the amended text inserted by the CRA III Directive 2013/14/EU, which came into force on 20 June 2013;

COMMISSION DELEGATED REGULATION (EU) /... of

Re: Consultative Document: Principles on Bail-in Execution

PRA RULEBOOK CRR FIRMS INSTRUMENT 2013

Prospectus Supplement (To Prospectus dated September 1, 2005)

Transcription:

Mutual Capital Instruments Mutuals 2013 Melbourne, Australia Michael Edwards VP & Chief Counsel World Council of Credit Unions

Basel III Capital Instrument Classes Basel III s Three Elements of Capital: 1. Tier 1 Capital (going-concern capital): a) Common Equity Tier 1 (CET1) b) Additional Tier 1 (AT1) 2. Tier 2 Capital (gone-concern capital) Bank for International Settlements (BIS) Tower, Basel, Switzerland

Basel III & Common Equity Shares Footnote 12 on Mutual CET1 Shares: The criteria also apply to non joint stock companies, such as mutuals, cooperatives or savings institutions, taking into account their specific constitution and legal structure. The application of the criteria should preserve the quality of the instruments by requiring that they are deemed fully equivalent to common shares in terms of their capital quality as regards loss absorption and do not possess features which could cause the condition of the bank to be weakened as a going concern during periods of market stress. Supervisors will exchange information on how they apply the criteria to non joint stock companies in order to ensure consistent implementation.

Common Equity Tier 1 (CET1) Shares What does Equivalent mean? Key issues for mutual shares as capital: 1. Loss Absorbency 2. Permanence Equivalent does not mean identical. Black s Law Dictionary definition of equivalent: 1. Equal in value, force, amount, effect, or significance. 2. Corresponding in effect or function; nearly equal; virtually identical. Downtown Basel

Basel III Negotiations European Association of Co-operative Banks (Dec. 2009 white paper on Basel III): In Basel, many regulators from countries where co-operative banks play a relevant role (not only in Europe)... think that co-operative shares should be treated as core tier 1 capital and suggested adding a provision to the [Basel III] 14 criteria [for CET1 instruments] that would allow [regulators] to deviate from the 14 criteria when the specific constitution and legal structure of cooperative banks so require. Barges on the Rhine in Basel

Basel III s 14 Points for Common Equity The 14 Points for CET1 Instruments: 1. The shares represent the most subordinated claim in liquidation. 2. The shares are entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (i.e. has an unlimited and variable claim, not a fixed or capped claim). 3. The principal is perpetual and never repaid (i.e. can never be withdrawn by the member) outside of liquidation (except for discretionary repurchases/redemptions at the option of the institution or other means of effectively reducing capital in a discretionary manner that is allowable under relevant law). 4. The institution does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled, nor do the statutory or contractual terms provide any feature which might give rise to such an expectation. 5. Distributions are paid out of retained earnings and/or capital contributed to the institution by issuing shares. The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that a institution is unable to pay distributions that exceed the level of retained earnings and/or contributed capital from share issuances). 6. There are no circumstances under which the distributions are obligatory. Nonpayment is therefore not an event of default. 7. Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital.

Basel III s 14 Points for Common Equity The 14 Points for CET1 Instruments (cont.): 8. It is the issued capital that takes the first and proportionately greatest share of any losses as they occur, i.e. the shares take these losses in the sense that shares own the institution s retained earnings, disclosed reserves, any CET1 stock surplus (share premium), and other components of CET1 capital. Within the highest quality capital, after retained earnings and reserves are exhausted, each instrument absorbs losses on a going concern basis proportionately and pari passu with all the others. 9. The paid-in amount is recognized as equity capital (i.e. not recognized as a liability) for determining balance sheet insolvency. 10. The paid-in amount is classified as equity under the relevant accounting standards. 11. The shares are directly issued and paid-in and the institution cannot directly or indirectly have funded the purchase of the instrument. 12. The paid in amount is neither secured nor covered by a guarantee of the issuer or related entity or subject to any other arrangement that legally or economically enhances the seniority of the claim. 13. It is only issued with the approval of the owners of the issuing institution (i.e. the members), either given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorized by the owners. 14. It is clearly and separately disclosed on the institution s balance sheet. Mittlere Brücke (Middle Bridge), Basel

Basel III Loss Absorption for AT1 & Tier 2 Two options for AT1 and Tier 2 loss absorption: 1. Replace impaired AT1 or Tier 2 instrument with CET1 instruments. See, e.g., British mutual bail-in 3:10 swap of CET1 for Tier 2 (i.e. Tier 2 holders received CET1 shares equal to 30% of Tier 2 bonds face value); or 2. Permanently write off impaired value pari passu (i.e. no possible recovery of value, except in liquidation claims process). See, e.g., NCUA Letter to Credit Unions No. 09- CU-10 ( Matters Related to Paid-in Capital and Membership Capital of Corporate Credit Unions ) (Mar. 2009). The Basel Rathaus

Mutual Shares as IFRS Equity IFRIC Interpretation 2 (Nov. 2004): 6. Members shares that would be classified as equity if the members did not have a right to request redemption are equity if either of the conditions described in paragraphs 7 and 8 is present or the members shares have all the features and meet the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D of IAS 32. Demand deposits, including current accounts, deposit accounts and similar contracts that arise when members act as customers are financial liabilities of the entity. 7. Members shares are equity if the entity has an unconditional right to refuse redemption of the members shares. 8. Local law, regulation or the entity s governing charter can impose various types of prohibitions on the redemption of members shares, eg unconditional prohibitions or prohibitions based on liquidity criteria. If redemption is unconditionally prohibited by local law, regulation or the entity s governing charter, members shares are equity. However, provisions in local law, regulation or the entity s governing charter that prohibit redemption only if conditions such as liquidity constraints are met (or are not met) do not result in members shares being equity. 9. An unconditional prohibition may be absolute, in that all redemptions are prohibited. An unconditional prohibition may be partial, in that it prohibits redemption of members shares if redemption would cause the number of members shares or amount of paid-in capital from members shares to fall below a specified level. Members shares in excess of the prohibition against redemption are liabilities, unless the entity has the unconditional right to refuse redemption as described in paragraph 7... IFRS Foundation, London, England

Basel III in the EU European Parliament Chamber

EU s Basel III CRD IV Package Cap. Req. Regulation (CRR) Article 29: 1. Capital instruments issued by mutuals, cooperative societies, savings institutions and similar institutions shall qualify as Common Equity Tier 1 instruments only if the conditions laid down in Article 28 with modifications resulting from the application of this Article are met. 2. The following conditions shall be met as regards redemption of the capital instruments: (a) except where prohibited under applicable national law, the institution shall be able to refuse the redemption of the instruments; (b) where the refusal by the institution of the redemption of instruments is prohibited under applicable national law, the provisions governing the instruments shall give the institution the ability to limit their redemption; (c) refusal to redeem the instruments, or the limitation of the redemption of the instruments where applicable, may not constitute an event of default of the institution.

EU s CRR Article 29 (cont.): 3. The capital instruments may include a cap or restriction on the maximum level of distributions only where that cap or restriction is set out under applicable national law or the statute of the institution. 4. Where the capital instruments provide the owner with rights to the reserves of the institution in the event of insolvency or liquidation that are limited to the nominal value of the instruments, such a limitation shall apply to the same degree to the holders of all other Common Equity Tier 1 instruments issued by that institution. The condition laid down in the first subparagraph is without prejudice to the possibility for a mutual, cooperative society, savings institution or a similar institution to recognize within Common Equity Tier 1 instruments that do not afford voting rights to the holder and that meet all the following conditions: (a) the claim of the holders of the non-voting instruments in the insolvency or liquidation of the institution is proportionate to the share of the total Common Equity Tier 1 instruments that those non-voting instruments represent; (b) the instruments otherwise qualify as Common Equity Tier 1 instruments.

EU s CRR Article 29 (cont.): 5. Where the capital instruments entitle their owners to a claim on the assets of the institution in the event of its insolvency or liquidation that is fixed or subject to a cap, such a limitation shall apply to the same degree to all holders of all Common Equity Tier 1 instruments issued by the institution. 6. [The European Banking Authority (EBA)] shall develop draft regulatory technical standards to specify the nature of the limitations on redemption necessary where the refusal by the institution of the redemption of own funds instruments is prohibited under applicable national law. EBA shall submit those draft regulatory technical standards to the Commission by 1 February 2015. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. Christine Matthews Tower 42, London, where the EBA is based

Take Aways for Mutual CET1 Capital Key features of Mutual CET1 instruments: 1. Must be called shares and be in the most senior share class with membership shares (but may be non-voting). 2. Must have variable dividends like common stock: The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap because non-payment of pre-set or capped dividends sends market signal that institution is in trouble and could cause a run. 3. If some CET1 shares claim on assets/reserves are limited, all CET1 shares claims on assets/reserves must be similarly limited. 4. Must be perpetual, permanent, at-risk, fully paid-in, non-withdrawable, and redeemable only: a) Out of proceeds of newly issued shares ( get in the queue model ); or b) From a redemption fund of CET1 share proceeds that are not counted as CET1 ( Quebec model ).

Thank You Questions? Michael Edwards VP & Chief Counsel World Council of Credit Unions