Commission Delegated Regulation (EU) 2023/827 of 11 October 2022 laying down regulatory technical standards amending Delegated Regulation (EU) No 241/2014 as regards the prior permission to reduce own funds and the requirements related to eligible liabilities instruments (Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (1), and in particular Article 28(5), third subparagraph, Article 29(6), third subparagraph, Article 52(2), third subparagraph, Article 72b(7), fourth subpagraph, Article 76(4), third subparagraph, Article 78(5), third subparagraph, Article 78a(3), fourth subparagraph, and Article 79(2), third subparagraph, thereof,

Whereas:

(1) Regulation (EU) 2019/876 of the European Parliament and of the Council (2) amended the terminology used in a number of Articles of Regulation (EU) No 575/2013. Those amendments should be reflected in Commission Delegated Regulation (EU) No 241/2014 (3), which sets out regulatory technical standards for own funds requirements for institutions.

(2) Regulation (EU) 2019/876 introduced into Regulation (EU) No 575/2013 new requirements for own funds and eligible liabilities for global systemically important institutions (G-SIIs) and for material subsidiaries of non-EU G-SIIs, as well as harmonised criteria for eligible liabilities items and instruments to comply with those requirements. Regulation (EU) 2019/876 also introduced Articles 72b(7) and 78a(3) into Regulation (EU) No 575/2013, which require the European Banking Authority (EBA) to develop draft regulatory technical standards specifying some of the eligibility criteria for eligible liabilities instruments as well as the permission regime for reducing those instruments. The own funds requirements for institutions and the new requirements for own funds and eligible liabilities pursue the same objective of ensuring that institutions have sufficient loss-absorbing capacity. For that reason, the standards for own funds instruments and the standards for eligible liabilities instruments are closely linked with each other, in particular where Regulation (EU) No 575/2013 expressly requires those standards to be fully aligned. To ensure coherence and consistency between the standards for own funds instruments and the standards for eligible liabilities instruments, and to facilitate a comprehensive view and compact access to those standards by persons subject to them, it is appropriate to incorporate the standards for eligible liabilities instruments into Delegated Regulation (EU) No 241/2014.

(3) The requirements for own funds and eligible liabilities in both Regulation (EU) No 575/2013 and Directive 2014/59/EU of the European Parliament and of the Council (4) share the same objective of ensuring that institutions have sufficient loss absorbing-capacity. For that reason, Directive (EU) 2019/879 of the European Parliament and of the Council (5) introduced into Directive 2014/59/EU Article 45b(1), which extended, for all resolution entities, the eligibility criteria for eligible liabilities instruments to liabilities eligible for meeting the minimum requirement for own funds and eligible liabilities (MREL), with the exception of the criterion referred to in Article 72b(2), point (d), of Regulation (EU) No 575/2013. In relation to resolution entities that are G-SIIs entities and Union material subsidiaries of non-EU G-SIIs, Directive (EU) 2019/879 introduced into Directive 2014/59/EU Article 45d. That provision provides in its paragraph 1, point (a), and in its paragraph 2, point (a), both read in conjunction with Article 45b(1), second subparagraph, that the eligibility of liabilities for meeting the minimum required level of MREL is conditional upon the compliance of those liabilities with the eligibility criteria for eligible liabilities instruments. Those criteria require, inter alia, that the liabilities are not funded directly or indirectly by the institution, that the liabilities cannot be reduced without prior permission of the resolution authority, and that the liabilities may not contain an incentive to redeem, except in the cases referred to in Article 72c(3) of Regulation (EU) No 575/2013. Similarly, in relation to entities that are not resolution entities, Directive (EU) 2019/879 introduced into Directive 2014/59/EU Article 45f. Paragraph 2, points (a)(ii) and (a)(v), of that Article made the eligibility of liabilities subject to compliance with certain eligibility criteria for eligible liabilities instruments and to the requirement that the acquisition of ownership of the liabilities is not funded directly or indirectly by the entity that is subject to that Article. It is therefore necessary to lay down that the provisions of Delegated Regulation (EU) No 241/2014 related to direct and indirect funding of eligible liabilities instruments, form and nature of incentives to redeem and prior permission to reduce such instruments should also be applied in a consistent manner for the purposes of Article 45b(1) and Article 45f(2), points (a)(ii) and (a)(v), of Directive 2014/59/EU. In order to ensure that consistency, the term ‘eligible liabilities instruments’ should also be understood as a reference to ‘eligible liabilities’ as referred to in Article 45b and Article 45f(2), point (a), of Directive 2014/59/EU, regardless of the residual maturity of those liabilities, and the term ‘institution’ should also apply to any entity subject to MREL in accordance with Article 45(1) of that Directive.

(4) Article 28(1), point (b), Article 52(1), point (c), and Article 63, point (c), of Regulation (EU) No 575/2013 make the eligibility of own funds instruments conditional on them not being funded directly or indirectly by the institution. Regulation (EU) 2019/876, by introducing in Regulation (EU) No 575/2013 Article 72b(2), point (c), extended that condition to eligible liabilities instruments, with the difference that, in line with the Total Loss-absorbing Capacity (TLAC) standard, eligible liabilities instruments should not be directly or indirectly funded by the resolution entity. Article 72b(7), first subparagraph, point (a), of Regulation (EU) No 575/2013 mandates the EBA to specify, through draft regulatory technical standards, the applicable forms and nature of indirect funding of eligible liabilities instruments. According to Article 72b(7), second subparagraph, of that Regulation, those draft regulatory technical standards are to be fully aligned with the delegated act referred to in Article 28(5), first subparagraph, point (a), of Regulation (EU) No 575/2013, which is Delegated Regulation (EU) No 241/2014. The provisions of that Delegated Regulation should therefore also apply to eligible liabilities instruments.

(5) The eligibility criterion on direct and indirect funding prevents the acquisition of ownership of own funds instruments and eligibile liabilities instruments funded directly or indirectly by an institution or resolution entity. Without that criterion, losses could come back to those entities, potentially diminishing or neutralising the loss relief that the instruments were supposed to provide. The risk of such a negative feedback loop also exists within banking and resolution groups, for instance in the context of the issuance and subscription of instruments eligible to meet the new internal MREL requirement laid down in Article 45f of Directive 2014/59/EU. The rules on direct and indirect funding of own funds and eligible liabilities instruments should therefore capture funding chains maintaining risks within a group, irrespective of whether those funding chains involve an external investor or not. Indeed, it is necessary to capture situations of intragroup circular funding so as to avoid circumvention of the rules on direct and indirect funding of own funds and eligible liabilities instruments which could occur, for instance, when funding is provided via subsidiaries of the institution or resolution entity or by other entities with which the institution or resolution entity has interdependencies. It should therefore not be necessary that the funding is provided by that institution to conclude that capital instruments or liabilities are directly or indirectly funded by the institution issuing such instruments or liabilities. Thus, a qualification of funding as direct or indirect funding may also be possible where that funding is provided by an entity included in the scope of prudential or accounting consolidation of the institution, the institutional protection scheme or the network of institutions affiliated to a central body to which the institution belongs, or the scope of supplementary supervision of the institution. That should apply regardless of whether that other entity belongs to another resolution group.

(6) Regulation (EU) 2017/2401 of the European Parliament and of the Council (6) removed the definition of ‘excess spread’ from Article 242 of Regulation (EU) No 575/2013. Since Article 12(3) of Delegated Regulation (EU) No 241/2014 uses that term by refering to Article 242 of Regulation (EU) No 575/2013, it is necessary to amend Article 12(3) of that Delegated Regulation by introducing a definition of the term ‘excess spread’ directly into that Article.

(7) Article 52(1), point (g), and Article 63, point (h), of Regulation (EU) No 575/2013 make the eligibility of Additional Tier 1 instruments and Tier 2 instruments conditional upon the absence of any incentive for their principal amount to be redeemed. Regulation (EU) 2019/876, by introducing in Regulation (EU) No 575/2013 Article 72b(2), point (g), extended that requirement to eligible liabilities instruments, with the difference that for eligible liabilities instruments incentives to redeem are permitted in the cases referred to in Article 72c(3) of Regulation (EU) No 575/2013. That amendment should be reflected in Delegated Regulation (EU) No 241/2014.

(8) With regard to index holdings, Regulation (EU) 2019/876 introduced into Regulation (EU) No 575/2013 Article 76. That Article extended the scope of the prior permission to be granted by the competent authority – allowing an institution to use a conservative estimate of the underlying exposure of the institution to instruments included in indices – to eligible liabilities instruments of institutions. That amendment should be reflected in Delegated Regulation (EU) No 241/2014. The provisions in that Regulation regarding estimates used as an alternative to the calculation of underlying exposures to own funds instruments included in indices being ‘sufficiently conservative’ and the meaning of ‘operationally burdensome’ should thus be amended to also apply to eligible liabilities instruments.

(9) Regulation (EU) 2019/876 inserted Article 78(1), second subparagraph, into Regulation (EU) No 575/2013 to enable competent authorities to grant to institutions a general prior permission to reduce own funds for a predetermined amount and a limited period of time. It is therefore necessary to remove from Delegated Regulation (EU) No 241/2014 preconditions and limits that are applicable to a prior permission for market-making purposes, since those preconditions and limits are now embedded in the general prior permission regime laid down in Article 78(1), second subparagaph, of Regulation (EU) No 575/2013.

(10) The prior permission regimes for reducing own funds, laid down in Article 78 of Regulation (EU) No 575/2013, and for reducing eligible liabilites instruments, laid down in Article 78a of that Regulation, both aim at ensuring compliance with regulatory requirements related to own funds and to own funds and eligible liabilities, and have a number of similar features. It is therefore necessary to standardise the processes followed by competent authorities and resolution authorities for both the general prior permission referred to in Article 78(1), second subparagraph, and Article 78a(1), second subparagraph, of Regulation (EU) No 575/2013, and any other permissions referred to in those Articles. Furthermore, to ensure that the specificities of any prior permission are taken into account, and to ensure that those permissions are appropriately used for their specific purposes, it is necessary to lay down that competent authorities and resolution authorities should be required to specify the period for which a prior permission other than a general prior permission is granted, and a maximum limit for that specified period should be established.

(11) Articles 78(1), second subparagraph, and 78a(1), second subparagraph, of Regulation (EU) No 575/2013 require the general prior permission for reducing own funds and eligible liabilities instruments to be granted for a specified period that shall not exceed one year. An application for the renewal of a general prior permission which has not yet expired should not require the same level of scrutiny or interaction between authorities as the application for the original permission, if the institution has not requested for an increase in the predetermined amount set when the original permission was granted and has not changed the rationale provided when the original permission was requested. Consequently, in those specific circumstances, the content of the application to be submitted by institutions and the timing for the submission of the application should be reduced.

(12) Article 77(2) of Regulation (EU) No 575/2013 requires institutions to obtain the prior permission of the resolution authority to effect the call, redemption, repayment or repurchase of eligible liabilities instruments. According to Article 78a(1) of that Regulation, the permission may only be granted where a number of conditions have been complied with, including the condition that the institution replaces the eligible liabilities instruments with own funds or eligible liabilities instruments of equal or higher quality at terms that are sustainable for the income capacity of the institution. Article 78a(3), second subparagraph, of Regulation (EU) No 575/2013 requires that the standards on the meaning of ‘sustainable for the income capacity of the institution’ in the context of eligible liabilities instruments are fully aligned with its equivalent for own funds. It is therefore necessary to specify that the same meaning of ‘sustainable for the income capacity of the institution’ is to be used for both types of instruments.

(13) It is necessary to align the general prior permission regimes for own funds and eligible liabilities instruments to ensure that those regimes are applied coherently across the Union. The predetermined amount to be set by resolution authorities when granting the general prior permission to reduce eligible liabilities instruments should therefore be subject to limits, without preventing resolution authorities to set lower predetermined amounts for a particular institution where justified by the specific circumstances of the case. It is also necessary to prevent institutions from operating at a level of own funds and eligible liabilities instruments that would fail to reflect that a part of the own funds and eligible liabilities instruments would not be available to absorb losses when needed. In case of a general prior permission, the predetermined amount for which the authority concerned has given its permission should therefore be deducted from the moment the authorisation is granted.

(14) It is necessary to ensure a proportionate treatment for institutions whose resolution plans provide that they are to be wound up under normal insolvency proceedings and for which the resolution authority has set the minimum requirement for own funds and eligible liabilities referred to in Article 45(1) of Directive 2014/59/EU at a level that does not exceed an amount sufficient to absorb losses. Those institutions should therefore be able to request a permission, including a general prior permission, for reducing eligible liabilities instruments based on a simplified application regime. Such a regime should entail reduced information requirements and, to further reduce the administrative burden of those institutions and of resolution authorities, the prior permission should be deemed granted in the absence of a reply from the resolution authority. Given that those institutions do not need to issue eligible liabilities instruments for meeting the minimum requirement for own funds and eligible liabilities, the predetermined amount of eligible liabilities instruments to be reduced should not be subject to the same limits as for other institutions.

(15) Article 78a(3) of Regulation (EU) No 575/2013 instructs the EBA to develop regulatory technical standards to specify the procedure for granting a permission to reduce eligible liabilities instruments and to specify the process of cooperation between the competent authority and the resolution authority. In order to ensure compliance with own funds and eligible liabilities requirements laid down in Regulation (EU) No 575/2013, Directive 2013/36/EU of the European Parliament and of the Council (7) and Directive 2014/59/EU, the process of cooperation between the competent authority and the resolution authority should include consultation with the competent authority on the application for prior permission received by the resolution authority. That consultation should be conducted in a way that enables the competent authority to express an informed view on the consultation, including where its agreement is required for establishing the margin by which the institution’s own funds and eligible liabilities must exceed its requirements, with an adequate exchange of information and sufficient time to respond to the consultation.

(16) Prior to the entry into force of Regulation (EU) 2019/876, Article 79(1) of Regulation (EU) No 575/2013 provided that a competent authority may temprorary waive the provisions on deductions for own funds instruments where an institution held those instruments in a financial sector entity for the purposes of a financial assistance operation designed to reorganise and save that entity. Regulation (EU) 2019/876, by amending Article 79(1) of Regulation (EU) No 575/2013, extended the scope of the temporary waiver that competent authorities may grant to institutions’ holdings of eligible liabilities instruments in an institution. As a result, the provisions of Delegated Regulation (EU) No 241/2014 concerning that temporary waiver should be amended to also apply to institutions’ holdings of eligible liabilities instruments in institutions.

(17) Delegated Regulation (EU) No 241/2014 should therefore be amended accordingly.

(18) This Regulation is based on the draft regulatory technical standards submitted to the Commission by the EBA.

(19) EBA has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (8).