The query primarily stems from an amendment in the Regulation’s text which was observed in Article 64 ‘Amortisation of Tier 2 instruments’ between CRR I (Regulation 575/2013) and CRR II (Regulation 2019/876), namely:

CRR I

The extent to which Tier 2 instruments qualify as Tier 2 items during the final five years of maturity of the instruments is calculated by multiplying the result derived from the calculation in point (a) by the amount referred to in point (b) as follows:

a) the nominal amount of the instruments or subordinated loans on the first day of the final five year period of their contractual maturity divided by the number of calendar days in that period;

b) the number of remaining calendar days of contractual maturity of the instruments or subordinated loans.

CRR II

1. The full amount of Tier 2 instruments with a residual maturity of more than five years shall qualify as Tier 2 items.
2. The extent to which Tier 2 instruments qualify as Tier 2 items during the final five years of maturity of the instruments is calculated by multiplying the result derived from the calculation referred to in point (a) by the amount referred to in point (b) as follows:

(a) the carrying amount of the instruments on the first day of the final five-year period of their contractual maturity divided by the number of days in that period;

(b) the number of remaining days of contractual maturity of the instruments.

We had previously enquired with our NCA on the implications of the change in wording, particularly from “nominal amount” to “full amount” or “carrying amount”, and in response been informed of the following:

“At the November 2019 SGOF meeting, it was concluded that the reference to “full amount” and “carrying amount” in paragraphs 1 and 2 of Article 64 (CRR2 version) should be considered as having the same meaning. All in all, it was concluded that the starting point is the accounting value, whatever this value might be.”

Considering the example of subordinated debt, and having regard to the Bank’s published financial statements, the “carrying amount” (i.e. accounting value) of the subordinated debt may be interpreted to incorporate both the principal element and the accrued interest, since both elements are presented within the same line item on the balance sheet.

Therefore, in view that the CRR II text refers to the “full amount”, we would like to confirm whether, for the purposes of reporting Own Funds under CRR II, this term is intended to capture both of the following elements as eligible Tier 2 capital:

(i) Principal amount; and

(ii) Accrued interest.

On the other hand, we acknowledge that the preconditions to determine eligibility of an instrument as Tier 2 capital include that: such instrument is “fully paid up” in line with Article 63(a); and has an original maturity of at least five years, as per Article 63(g).

To this end, it is our understanding that under the CRR, accrued interest is not “fully paid up” in nature since it is not available for the Bank’s unrestricted use, and therefore, fails to meet the eligibility criteria of Article 63(a). Moreover, due to its short-term nature, it does not meet the criteria outlined in Article 63(g).