- Question ID
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2023_6886
- Legal act
- Regulation (EU) No 575/2013 (CRR)
- Topic
- Own funds
- Article
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78
- Paragraph
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1
- Subparagraph
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b
- COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations
- Regulation (EU) No 241/2014 - RTS for Own Funds requirements for institutions
- Article/Paragraph
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28(2)
- Type of submitter
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Competent authority
- Subject matter
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Share buyback program: amount of upfront deduction
- Question
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Does the upfront deduction under Article 28(2) of Commission Delegated Regulation (EU) No 241/2014 as specified by Q&A 3277 include in addition to CET1 instruments and related share premium accounts also the other CET1 items that are reduced by a share buyback program authorized pursuant to Article 78(1)(b) CRR?
- Background on the question
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Share buyback programs often involve the reduction of other CET1 items in addition to the reduction of capital instruments (Article 26(1)(a) CRR) and the related share premium accounts (Article 26(1)(b) CRR). This is particularly the case for share buybacks conducted in the open market, where typically retained earnings (Article 26(2)(c) CRR) are utilised to offset any positive difference between (i) the market value of the capital instruments and (ii) the accounting book value of the capital instruments and related share premium accounts.
The question arises what amount is to be deducted upfront in accordance with Article 28 of Commission Delegated Regulation (EU) No 241/2014 (RTS on Own Funds and Eligible Liabilities):
- The amount of CET1 instruments and related share premium accounts that are subject to the competent authority’s permission under Article 77(1) CRR. or
- The total amount of CET1 items that are reduced by the share buyback program – i.e. the accounting book value of CET1 instruments and related share premium accounts plus the amount by which other CET1 items (e.g. retained earnings or other available reserves) are reduced.
- Submission date
- Final publishing date
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- Final answer
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In accordance with Article 30(1)(e) of Commission Delegated Regulation (EU) No 241/2014, institutions are required to submit “present and forward-looking information on the level and composition of own funds and the level and composition of own funds and eligible liabilities held to ensure compliance, respectively, with the requirements referred to in points (d)(i) to (d)(viii) before and after performing any of the actions listed in Article 77(1) of Regulation (EU) No 575/2013”. This provision must be read as requiring institutions to submit information on the maximum amount (in EUR) that they intend to spend on the share buy-back program. This information is key to allow the competent authority to determine the impact of the transaction and to assess the fulfilment of the condition set out in Article 78(1)(b) CRR.
When competent authorities grant a permission to reduce own funds pursuant to Article 78(1)(b) CRR, they shall explicitly state the maximum amount (in EUR) that institutions are allowed to spend, regardless of how this amount is allocated among the different CET1 items. Such amount must generally be deducted upfront from the corresponding CET1 items as of the moment the permission is granted, in line with Q&A 3277.
The need to have the upfront deduction of the maximum amount (in EUR) that institutions are allowed to spend in a share buyback program, regardless of the way in which such amount is allocated among CET1 items, is based on the following reasons:
- An upfront deduction of merely capital instruments and related share premium accounts would not faithfully represent the actual impact on own funds stemming from the reduction. Since the rationale of the upfront deduction is to anticipate the effect of the own funds reduction at the moment of the permission, it does not make sense economically and prudentially to not reflect at this earlier point in time the entire impact but only a portion of it.
- The competent authority’s assessment under Article 78(1)(b) CRR is made on the basis of the maximum impact on CET1 capital as this is the information used to calculate the institution’s margin over the respective requirements.
- Status
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Final Q&A
- Answer prepared by
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Answer prepared by the EBA.
Disclaimer
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