European Banking Authority (‘EBA’) Report on the Monitoring of Additional Tier 1 (‘AT1’) Instruments of European Union (‘EU’) Institutions

The European Banking Authority (‘EBA’) clarifies compatibility between ESG features and regulatory eligibility criteria amid growing issuance of ESG-related instruments to finance and capitalize green portfolios. The EBA considers:

  • Interaction between instruments issued with ESG features and Bank Recovery and Resolution Directive (‘BRRD’) requirements Capital Requirements Regulation (‘CRR’) eligibility criteria.
  • Differences of clauses based on a larger set of regulatory ESG transactions in comparison to the Total Loss-Absorbing Capacity (‘TLAC’) and Minimum Requirements for Own Funds and Eligible Liabilities (‘MREL’) monitoring frameworks.
  • Consistency with EU-level mandates including the EU Green Bond Standard (‘EU GBS’)
  • Differentiate loss absorbency, status of the notes/subordination, event of default, early redemption or acceleration rights between bonds used ESG financing, e.g. senior debt and covered bonds.
  • Risk of predefined sustainability features or ESG objectives impacting the eligibility criteria of the instrument, in particular, regarding:
    • Permanence (early redemption or other incentive to redeem, e.g. step-up or fee linked to specific ESG targets),
    • Loss absorption (write-down or conversion, acceleration rights, possibility of bail-in etc.),
    • Flexibility of payments.

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