Question ID
2018_3821
Legal act
Regulation (EU) No 575/2013 (CRR)
Topic
Own funds
Article
26
Paragraph
2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
Regulation (EU) No 241/2014 - RTS for Own Funds requirements for institutions
Article/Paragraph
Articles 2 and 3
Type of submitter
Competent authority
Subject matter
Inclusion of interim profits in CET1
Question

Could interim profits, which are not profits from the recent reporting period but from the previous one, be included in CET1 capital before the institution has taken a formal decision confirming the final profit or loss of the institution for the year on the basis of Article 26(2) CRR?

Background on the question

Example: An institution included in CET1 capital 25% of its interim profits from Q1 in April and 25% of its interim profits from Q2 in July. Each time an institution fulfilled requirements from points (a) and (b) of Article 26(2) and obtained competent authority’s permission for including interim profits in CET1 capital (in both cases an institution applied for 25% of interim profits from a relevant quarter to be included in CET1 and permissions were granted).

In October, an institution decided it would like to include another 25% of its profits from Q1 and 25% of its profits from Q2 (50% of Q1-Q2 profits in total) without taking decision about profits from Q3 yet (Q3 profits may be still not calculated or not audited). The dividend pay-out ratio specified in dividend policy is 50%. Given that application is considered in October, would it be possible for an institution to apply to include Q1 and Q2 profits only (Q3 profits may be still not calculated or not audited). Issue is more pronounced in a local translation of the CRR as the ‘interim profits are translated as a ‘current period profits’.

 

Submission date
Final publishing date
Final answer

On the basis of Article 26(2) of Regulation (EU) No 575/2013 (CRR) an institution may include interim profits in CET1 capital before it has taken a formal decision confirming the final profit or loss of the institution for the year only with the competent authority’s prior permission, and subject to the conditions set out in a) that those profits have been verified by persons independent of the institutions that are responsible for the auditing of the accounts of that institution and b) the institution has demonstrated to the satisfaction of the competent authority the deduction of any foreseeable charge or dividend from the amount of those profits. Additional conditions are included in Articles 2 and 3 of Regulation (EU) No 241/2014 - RTS for Own Funds requirements for institutions.

If all abovementioned conditions are met, the institution from the example above, will be able to include the additional interim profits from Q1 and Q2 into CET1 capital, even if its Q3 profits may still not be calculated or audited. In case of losses occurring in Q3, such losses would be immediately deducted from CET1 capital on the basis of Article 36(1)(a) CRR.

 

Status
Final Q&A
Answer prepared by
Answer prepared by the EBA.
Note to Q&A

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.

Disclaimer

The Q&A refers to the provisions in force on the day of their publication. The EBA does not systematically review published Q&As following the amendment of legislative acts. Users of the Q&A tool should therefore check the date of publication of the Q&A and whether the provisions referred to in the answer remain the same.