Commission recalls rules concerning Tier 1 and Tier 2 capital transactions for banks subject to restructuring aid investigation
08 October 2009
Following questions from market operators, the Commission recalls its July 2009 Communication stipulating that "banks should not use state aid to remunerate own funds (equity and subordinated debt) when their activities do not generate sufficient profits”
Market operators have recently posed questions concerning banks, that are the subject of pending European Commission investigations, regarding the grant of restructuring aid to repay bonds before maturity. In the light of this, the Commission would like to recall its Communication on restructuring aid to financial institutions of July 2009 stipulating that "banks should not use state aid to remunerate own funds (equity and subordinated debt) when their activities do not generate sufficient profits”.
In a restructuring context, measures which reduce the total amount of own funds (payments on hybrid instruments, avoidance of loss absorption, buy-backs, exercise of call options) are, in principle, not compatible with the objective of "burden sharing" (i.e. banks must pay a significant share of the costs of restructuring) and the "minimum necessary" requirement (i.e. the amount of state aid must not exceed the minimum necessary to allow the bank to restructure).
For these reasons, banks subject to state aid investigations should consult the Commission before making announcements to the market concerning Tier 1 and Tier 2 capital transactions.
Transactions such as coupon payments, buy-backs and the exercise of call-options of Tier 1 and Tier 2 capital instruments reduce the total regulatory capital of a financial institution and put into question whether granted state resources were limited to the minimum necessary. Moreover, such measures may infringe the principle of burden sharing in so far as they protect Tier 1 and Tier 2 capital holders from their exposure to the inherent risk of the investment.
Such transactions by financial institutions subject to restructuring obligations may have implications for the compatibility of the aid received. On the other hand, the Commission may accept these transactions on the basis of a case-by-case assessment, after balancing the above mentioned principles of burden sharing and limiting aid to the minimum against the contribution of the transaction to the refinancing capability and return to viability of the institution. For these reasons, banks subject to state aid investigations should consult the Commission before making announcements to the market concerning Tier 1 and Tier 2 capital transactions.
© European Commission
