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BANK CAPITALREPORT 2014

INTRODUCTION

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S ince the publication of our first Regulatory Capital Survey in late 2013 we have wit-nessed significant progress in the streamlining of the supervisory framework for banksin Europe.

The EU’s variant of Basel III, the Capital Requirements Directive (CRD IV), entered into forcein July 2013. The final text of the Bank Recovery and Resolution Directive (BRRD) was pub-lished months later, in June 2014.

EU member states need to act swiftly to comply with tight deadlines to transpose various aspectsof the EU directives into national rules and legislation. Switzerland, in the meantime, is directlyimplementing Basel III.

For this publication, leading regulatory capital lawyers in nearly a dozen European countrieshave provided us with a comprehensive overview of the state and pace of implementation ofprudential regulation in their respective jurisdictions.

This survey clearly reflects the different approaches member states choose when it comes tothe national implementation of international rules and agreements. Several EU countries strug-gle with the January 1 2015 deadline to transpose the BRRD into local law. In others, draftlegislation is awaiting final parliamentary approval, but there are still jurisdictions where noteven a draft is available.

Another aspect highlighted by our survey is how, where choices are available, some countriestend to go for the strictest option, while others prefer the most bank-friendly route. The treat-ment of deferred tax assets or government bonds held in the available-for-sale portfolio, orgrandfathering provisions for instruments that no longer qualify as regulatory capital come tomind.

Other areas, notably the tax treatment of additional tier 1 and tier 2 instruments, are entirelyleft to national law makers. The EU or the Basel Committee on Banking Supervision offer noguidance on tax, and, at least from an issuer’s and investor’s point of view, more clarification isdesirable in some countries.

While the standardisation of prudential regulation increases, the process is far from finished:transitional rules allow EU states to implement CRD IV at their own pace and will stay withus well into the 2020s. And some issues are still subject to debate and pending supranationalguidelines, see the ongoing leverage ratio debate in Europe.

Still, in the next 12 months the focus of attention will shift somewhat: A time will come whenmost relevant rules and laws are in place, but it will take longer to see how those play out inpractice.

Take, for instance, the single supervisory mechanism, SSM. In early November the ECB tookover supervision of around 130 significant banks in the eurozone. But at the time of going toprint, we know little about the work in practice of joint supervisory teams comprising ECBstaff as well as representatives of national authorities, which will actually supervise Sifis fromnow on.

I would like to thank all our authors for their contribution to the IFLR Regulatory Capital Re-port 2014. I hope that you will find this guide a useful tool, helping you to navigate your waythrough prudential regulation in European key jurisdictions.

Ben Bschor, Regulatory Editor, IFLRNovember 2014

Navigating regulatoryconvergence

CONTENTS


Contents

Country reportsDenmark 4Michael Steen Jensen and Peter QvistGorrissen Federspiel

France 9Amélie ChampsaurCleary Gottlieb Steen & Hamilton

Germany 14Bernd Geier and Dirk EiselAllen & Overy

Ireland 19Robert CainArthur Cox

Italy 22Enrico Giordano, Vincenzo Troiano and Gregorio ConsoliChiomenti Studio Legale

Luxembourg 28Patrick Geortay and Cathrine Foldberg MøllerLinklaters

The Netherlands 34Jurgen van der Meer and Harm HommesClifford Chance

Spain 37Yolanda Azanza and Roberto GrauClifford Chance

Switzerland 42René Bösch and Benjamin LeisingerHomburger

United Kingdom 46Alan Newton and Chen-Lum HongFreshfields Bruckhaus Deringer

1. Relevant authorities

1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?The Danish Financial Supervisory Authority (FSA) is the supervising au-thority that governs banks, mortgage-credit banks, pension and insurancecompanies.

The FSA’s main task is to supervise the financial institution’s compliancewith financial regulation. The FSA also contributes to the preparation of fi-nancial regulation, including implementation of EU directives and regula-tions; it also collects and disseminates knowledge about the financial sector.

The remits of the FSA are, among other things, to execute supervisory re-actions towards financial institutions.

2. Capital structure

2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?For Danish banks (pengeinstitutter) only capital instruments that qualify asCET1 under regulation (EU) no. 575/2013 of June 26 2013 on prudentialrequirements for credit institutions and investment firms ( CRR) are eligibleto qualify as CET1 capital. There are no specific Danish rules regardingother instruments that can qualify as CET1 for banks.

Special rules apply to Danish mortgage-credit banks. Under section 13, sub-section 2 of consolidated act no. 911 of August 4 2014 on financial business(the Financial Business Act), in the case of Danish mortgage-credit banks(realkreditinstitutter) that have been transformed into limited liability com-panies, and where a fund or association is the main shareholder, shares with-out voting rights are eligible to qualify as CET1 capital.

In Denmark, mutuals (gensidige selskaber) do not qualify as credit institu-tions.

Denmark has implemented special rules as to when the equity instrumentsof cooperative societies (andelskasse) and savings institutions (sparekasse) areeligible as CET1 capital. Under sections 83a and 87a of the Financial Busi-ness Act, equity instruments issued by either cooperative societies or savingsinstitutions can, even though they include a cap or restriction on the max-imum level of distribution, qualify as CET1 capital.

2.2 What instruments qualify as AT1 capital?The question on which instruments qualify as AT1 capital is governed bythe CRR and EBA’s guidelines on own funds. Neither the Danish FSA northe Danish parliament has issued other rules, guidelines or statements onwhich instruments qualify as AT1 capital.

3. Capital requirements (capital triggers and bufferrequirements)

3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation?The combined buffer requirements are implemented in the Financial Busi-ness Act section 125 a-h, which will enter into force on January 1 2015.

The combined buffer requirement will be fulfilled with CET1 capital ac-cording to section 125a, subsection 7 of the Financial Business Act.

The capital conservation buffer will be gradually phased in, reaching full ef-fect on January 1 2019. In the period January 1 2015 to December 31 2015,the capital conservation buffer will be 0% of the amount of the credit insti-tution’s risk exposure. The capital conservation buffer will increase to0.625% in the period January 1 2016 to December 31 2016. The requiredcapital conservation buffer will increase by 0.625 percentage points per yearuntil it reaches a maximum of 2.5% of the credit institution’s risk exposureamount as from January 1 2019.

The counter-cyclical buffer rate, which is used to determine the institution-specific counter-cyclical capital buffer, will also be gradually phased in dur-ing a period of five years. The counter-cyclical buffer rate for credit exposuresin Denmark is to be determined quarterly by the Danish ministry of busi-ness and growth and published on their website, www.evm.dk. The counter-cyclical buffer rate will start at a maximum of 0.5% in 2015. This maximumlimit will then increase by 0.5 percentage points every year to a maximumlimit of 2.5% in 2019.

As regards the systemic risk buffer and the G-SII-buffer, please see our re-sponse to question 10 below.

3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?The Financial Business Act refers directly to the CRR when determiningthe requirement for capital instruments qualifying as AT1 capital. Thus cap-ital instruments with a trigger of 5.125% CET1 capital ratio will qualify asAT1 capital.

As a general rule, only CET1 capital can be used to fulfil a credit institution’sindividual solvency requirement. However, if an AT1 or a tier 2 capital instru-ment complies with the guidelines published by the Danish FSA in September2013, they, too, can be used to fulfil the individual solvency requirement. Theguideline makes it thereby possible for Danish credit institutions to issue con-tingent convertible bonds known as ’CoCos‘. If either the AT1 capital or tier2 capital is used to fulfil the individual solvency requirement, the instrumentwill include a loss absorption mechanism. This mechanism can be either con-version into ordinary shares, permanent write-down or temporary write-downwith a subsequent write-up. The loss absorption mechanism will be triggeredwhen the credit institution breaches a trigger of 7.0% CET1 capital ratio.

Therefore, the relevant CET1 capital ratio trigger for AT1 instruments byDanish credit institutions will depend on whether the AT1 instrument willbe used only as an instrument to the credit institution’s total capital, orwhether it will be used as an alternative to CET1 capital to fulfil the indi-vidual solvency requirement.

DENMARK

IFLR REPORT | BANK CAPITAL REPORT 2014 WWW.IFLR.COM4

Denmark

Michael Steen Jensen and Peter Qvist, Gorrissen Federspiel

www.gorrissenfederspiel.com

DENMARK


3.3 How is the PONV defined in your jurisdiction?The definition of the point of non-viability, ’PONV‘, is part of directive2014/59/EU on establishing a framework for the resolution and recoveryof credit institutions and investment firms (the ’BRRD‘); and as the BRRDhas not yet been implemented in Denmark, ‘PONV’ has not yet been de-fined in Danish legislation. Regarding the implementation of the BRRD inDenmark please see our response to question 15.1 below.

3.4 What are the grandfathering provisions and how are theyimplemented?The grandfathering provisions for CET1, AT1 and tier 2 capital instrumentsare implemented in executive order no. 294 of March 27 2014 on grandfa-thering provisions under the CRR.

Under section 8 of the executive order, the limit for including CET1, AT1and tier 2 capital instruments covered by article 484 of the CRR is: 80% in2014, 70% in 2015, and so on, decreasing by 10 percentage points everyyear until it reaches 10% in 2021. The Danish FSA has therefore decidedto set the highest possible limit available under the CRR. From January 12022 it will no longer be possible for credit institutions to include CET1,AT1 and tier 2 capital instruments covered by article 484 in the CRR.

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding?Banks that use the internal IRB approach when calculating their credit ex-posure amount are required to carry out a stress test once a year. The re-quirements for those tests are explained in guideline no. 9048 of February7 2013. As a general rule, the stress test will be submitted to the FSA nolater than 45 bank days after the commencement of a new year.

Under section 354f of the Financial Business Act the FSA can disclose theresult of a stress test to the public. However, so far these annual stress testshave not been disclosed.

The national stress test for 2014 is based on macroeconomic criteria whichare updated by the FSA every year. These consist of a basis point scenarioand a stress scenario. The national stress test as a general rule is based onthe figures of the annual report for the previous year, for example, the stresstest for 2014 will be based on the figures from the annual report of 2013.Changes to the bank’s total capital can be taken into account if the changesare certain at the time the bank submits its results for the stress test.

4.2 Which national body is conducting the tests?The Danish FSA conducts the stress tests.

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?Please see our response to question 4.1 above.

4.4 How does the AQR feed into your jurisdiction’s stress tests(where relevant?)Not relevant.

4.5 Are any supplementary banks (where relevant) being selectedfor EBA testing too?In 2011, Danske Bank, Jyske Bank, Sydbank and Nykredit, which are thefour largest Danish banks (excluding Nordea Bank Danmark) were electedto participate in the EBA stress test.

The same banks tested in 2011 participated in the 2014 EU-wide stress testcarried out by the EBA.

5. Bank Supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all? When the BRRD is implemented, a resolution authority will be appointedunder Danish law, but it is still uncertain which authority will be appointedfor this purpose. The Danish FSA will also have increased tasks in relationto the BRRD.

Please see below regarding Denmark’s participation in the Banking Union.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?The JSTs are a part of the Single Supervisory Mechanism (SSM). It is un-clear if and how the JST will work in Denmark as the Danish governmentis yet to decide whether or not Denmark should become part of the BankingUnion.

5.3 How will they impact the implementation of revised capital plansfollowing stress tests?Please see our response to question 5.2 above.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?As a general rule, coupon payments under AT1 capital instruments are taxdeductible, cf. section 6 B, subsection 1 of the Danish Tax Assessment Act,consolidated act no. 405 of April 22 2013 (’Danish Tax Assessment Act‘).

Tier 2 CoCos are also usually tax deductible in line with the Danish TaxAssessment Act.

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?Usually, no withholding tax is deducted by the credit institution from anypayment made under an AT1 or tier 2 CoCo instrument, except in certaincases of payments in respect of controlled debt in relation to the credit in-stitution.

Instruments included in section 6B of the Danish Tax Assessment Act areconsidered debt/receivables.

Capital gains on debt are taxable in accordance with the Danish Capital andExchange Gains Act. Capital gains on debt realised upon a full or partialrelease from or cancellation of debt will be deemed taxable income.

6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction? When CRD IV/CRR were implemented in Danish legislation, section 6Bof the Danish Tax Assessment Act was changed for the purpose of makingAT1 instruments tax deductible.

7. Loss absorption features

7.1 What type of loss absorbency features are/ will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?The loss absorbency features required for AT1 and T2 securities to be treatedas AT1 and T2 capital are the applicable provisions in the CRR.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?Tier 2 capital is defined as ’gone concern capital‘, according to the CRR,and as no Danish legislation applies stricter rules to tier 2 instruments, it isnot necessary that tier 2 capital is loss absorbing.

DENMARK


According to the rules in the BRRD tier 2 capital can also be subject to thebail-in tool, which would lead to an increase in the loss absorbency of tier2 capital. Furthermore, if a tier 2 capital instrument is used to fulfil thecredit institution’s individual solvency requirement, the tier 2 capital instru-ment will include a special loss absorption mechanism as described in ourresponse to question 3.2 above.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?There are no additional local rules that go further than the CRD IV/CRRas regards an issuer’s discretion to make a coupon payment.

8.2 How are MDAs calculated, and what happens in case of abreach?Subject to section 125b, subsection 8, the Danish FSA will issue an executiveorder specifying the calculation of the maximum distributable amount. TheFSA has not yet issued such an executive order, therefore, it is not yet clearhow the calculation of the MDA or breach of the MDA will be imple-mented under Danish law.

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?According to the FSA’s March 21 2014 announcement, Danish banks arerequired to submit their relevant leverage ratios every quarter. This require-ment will be in force for the rest of 2014, but the FSA has not yet publishedthe relevant ratios or dates for submissions in 2015.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?The FSA’s view is that all qualifying AT1 capital under the CRR can counttowards a credit institution’s leverage ratio.

10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements?As described in our response to question 2.1 above, mutuals cannot obtaina banking licence under Danish law.

10.2 Have additional rules and regulations been issued in relationto Sifis?Under section 308 of the Danish Financial Business Act, the FSA will decideevery year which Danish banks and other financial institutions will qualifyas Sifis based on a number of parameters, including the balance of the fi-nancial institution. Banks and financial institutions can also be appointedas Sifis through a specific assessment. On June 19 2014 the FSA announcedthat the following Danish banks and mortgage-credit banks had been ap-pointed as Sifis: Danske Bank, Nykredit Realkredit, Nordea Bank Danmark,Jyske Bank, Sydbank and DLR Kredit.

None of the Danish Sifis have been appointed as either global systemicallyimportant institutions (G-SIIs) or other systemically important institutions(O-SIIs).

A number of stricter rules will apply to the Danish Sifis. Under section 313of the Danish Financial Business Act, a member of the board of directors inan Sifi can only have a limited number of other directorships. If a directoris the managing director in another company, the director can only havetwo other directorships. If a director is not a managing director in anothercompany, the director can have up to four other directorships.

The appointed Danish Sifis will also have to fulfil a systemic risk buffer,which is determined by the ministry of business and growth and which willenter into force on January 1 2015. The ministry has not yet disclosed finalinformation on the level of the systemic risk buffer.

The grounds for regulation of the Sifis were compromised under a politicalagreement between the Danish government and a major part of the oppo-sition. According to the political agreement, the systemic risk buffer will bebetween 1% and 3% of the amount of the Sifi’s total risk exposure. The sys-temic risk buffer will be determined individually for each Sifi and will begradually phased in. The gradual phase-in means that a requirement of asystemic risk buffer of 1% in 2015 is converted into a requirement of 0.2%.In 2019 the systemic risk buffer will be completely phased in, and at thatpoint a requirement of 1% will mean a requirement of 1%.

The systemic risk buffer will also have to be fulfilled with CET1 capital, cf.section 125a, subsection 7 of the Danish Financial Business Act.

It is yet uncertain whether the Sifis also will have to fulfil stricter liquidityrequirements.

The Danish Sifis will also have to comply with stricter rules on corporategovernance.

11. Regulatory intervention

11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?If a Danish credit institution does not fulfil the individual solvency require-ment it may be met with certain restrictions from the FSA. Among otherthings, those restrictions might mean that the credit institution is prohibitedfrom making coupon payments on its CET1, AT1 and tier 2 instrumentsand that it has to refrain from taking on any further substantial credit riskexposure until it is able to fulfil its individual solvency requirement. TheFSA will also require that the credit institution submits a recovery plan.

In 2014 four credit institutions have failed to fulfil their individual solvencyrequirement and have therefore been met with the above mentioned restric-tions from the Danish FSA. Those four credit institutions are: Vestjysk Bank,Østjydsk Bank, Vistoft Sparekasse and Københavns Andelskasse. VestjyskBank and Københavns Andelskasse have resumed the fulfilment of their in-dividual solvency requirement. Vistoft Sparekasse was earlier this yearmerged into Sparekassen Djursland.

The latest example of a failing credit institution occurred at the beginningof 2013. The Danish bank Sparekassen Lolland was unable fulfil its indi-vidual solvency requirement and the 8% total capital ratio. Jyske Bank (amajor Danish bank) took over all of its banking activities including clients,employees and branches of Sparekassen Lolland, but did not take over theobligations of Sparekassen Lolland’s subordinated debt and equity. Thetransaction was carried out as a private solution under market conditionswithout activating the Danish resolution regime.

As a result of the financial crisis a total of 62 banks in Denmark ceased op-erating during the period 2008 to August 2013. Some credit institutionsbecame distressed and have since been wound up under the auspices of thegovernment winding-up company, Finansiel Stabilitet, while other chal-lenged credit institutions found a private solution. Many of these credit in-stitutions were small, and some did not cease as a direct consequence of thefinancial crisis.

DENMARK


12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?The pillar 2 requirements include, among other things, the individual sol-vency requirement and the individual solvency need. The board of directorsof any credit institution in Denmark is required to calculate its individualsolvency need. The solvency need is expressed as the adequate total capitalas a percentage of the credit institution’s total risk exposure.

The FSA may lay down a higher individual solvency requirement than thesolvency need laid down by the board of directors.

As a general rule, the individual solvency requirement will be fulfilled withCET1 capital. However, if certain capital triggers are included, AT1 andtier 2 capital can also be used to fulfil the individual solvency requirement.Please see our response to question 3.2 above regarding the requirements inrelation to the AT1 and tier 2 capital.

12.2 If so, what are the disclosure requirements around pillar 2, ifany? Under section 4, cf. annex 2 of executive order no. 295 of March 27 2014on the calculation of risk exposure, total capital and solvency needs, Danishcredit institutions are required to disclose their individual solvency needs.Under section 6 of the executive order, credit institutions that are listed, orhave net capital plus deposits (arbejdende kapital) of at least DKK 12 billion($2 billion) must disclose their individual solvency needs quarterly. Othercredit institutions are required to disclose their individual solvency needstwice a year.

Under section 354a, subsection 1 of the Financial Business Act, a Danishcredit institution is required to disclose a decision from the FSA regardingan individual solvency requirement. This disclosure must be made on thecredit institution’s website as soon as possible, and no later than three daysafter the decision is made. Disclosure of the decision can be postponed if itwould lead to excessive damage to the credit institution. The explanatorynotes to section 354a state that if the disclosure could lead to a run on thebank, the disclosure can be postponed. However, even if the disclosure of adecision would lead to a decrease in the credit institution’s share price, lossof clients or similar, this would not justify postponement of the disclosure.

12.3 What, when, and how are banks required to disclose buffer/trigger information and what are the consequences for couponpayment if they disclose a breach? There are no specific disclosure rules regarding the breach of a contractualCET1 capital ratio trigger by a Danish credit institution. Breach of the con-tractual CET1 capital ratio trigger, depending on the agreed loss absorptionmechanism, will have consequences for the credit institution’s ability tomake coupon payments. As mentioned earlier in the questionnaire, the Dan-ish implementation of the combined buffer requirements will first enter intoforce in 2015. If a credit institution does not fulfil the combined buffer re-quirement, among other things, it will be required to calculate its MDAand submit this and a capital conservation plan to the FSA. If the credit in-stitution breaches the combined buffer requirement and is unable to calcu-late and provide the MDA and the capital conservation plan to the FSA,this could lead to the credit institution being unable to satisfy its couponpayments. Where a bank is listed on the Nasdaq OMX Copenhagen, abreach of a CET1 capital ratio trigger can be price sensitive and therefore,generally an announcement would be made to the market.

12.4 Will specific reporting requirements be imposed for thepurpose of matching new deal structures? We are not aware of any such specific reporting requirements.

13. Regulatory calls

13.1 Are there any local provisions that could trigger earlyredemption?There are no specific rules regarding early redemption.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?As far as we are aware, neither the FSA nor parliament has issued rules,guidelines or statements on the use of credit default swaps or other tools tohedge against default or other credit instruments to lower regulatory capitalrequirements.

15. Bank recovery/ bail-in

15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?The implementation of the BRRD has been subject to a public consultation.The period for interested parties to comment on the proposed implementingbill ended on November 7 2014. The implementation of the BRRD isplanned via a new Act on resolution and recovery of credit institutions andby amendments to different existing Acts, including the Financial BusinessAct. We expect that the bills to implement the BRRD will be submitted toparliament in December 2014.

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?No.

15.3 To qualify for bail-in and state aid, do regulators requireminimum eligible liabilities? As the BRRD has yet not been implemented in Denmark we do not knowif the FSA will require any minimum of eligible liabilities.

16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?We are not aware of any such rules.

DENMARK


About the authorMichael Steen Jensen is a partner in the Danish law firm GorrissenFederspiel and head of the firm’s banking and finance group.

He has more than thirty years’ experience advising domestic and foreignbanks and financial institutions on all aspects of financial law, securities,structured products, securitisations, project financing and regulatorymatters, including netting, collateral and clearing. He has acted on therescue and public take-over of Danish banks and has represented theDanish central bank and the Danish Financial Stability Company inmajor bank take-over and winding-up transactions.

Michael Steen JensenPartner, Gorrissen Federspiel

Copenhagen, DenmarkT: +45 33 41 41 96 E: [email protected] W: www.gorrissenfederspiel.com

About the authorPeter Qvist is an assistant attorney at the Danish law firm GorrissenFederspiel and works in the firm’s banking and finance group.

Peter completed his Master of Laws in 2014 at the University ofCopenhagen.

Peter QvistAssistant attorney, Gorrissen Federspiel

Copenhagen, DenmarkT: +45 33 41 42 16E: [email protected]: www.gorrissenfederspiel.com

FRANCE



1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?The main French supervisory authority competent in connection with theimplementation of Basel III/CRD IV is the Autorité de contrôle prudentialet de regulation (ACPR). In addition to the ACPR, the Haut Conseil de laStabilité Financière (HCSF) is responsible for setting the counter-cyclicalbuffer and the systemic risk buffer requirements. As of November 2014, theEuropean Central Bank is the main competent supervisory authority in therespect to significant French Banks.

ACPRThe ACPR is an independent administrative authority whose purpose is tomaintain stability across the financial system and protect the clients of theentities subject to its oversight.

The ACPR is notably responsible for:• reviewing applications for authorisations or exemptions under European

rules and regulations;• monitoring the financial and operating conditions of the parties subject

to its oversight, particularly with respect to solvency requirements,liquidity requirements and those parties’ ability to meet commitmentsto clients and other third-parties;

• determining capital buffers applicable to global Sifis and other Sifis andoverseeing compliance with all capital buffers; and,

• developing and implementing measures to prevent and resolve bankingcrises to preserve financial stability, the ability of systemically importantinstitutions to continue their activities and operations, protect depositorsand avoid recourse to public funds to the greatest extent possible.

To accomplish the above, the ACPR has the authority to inspect, investigateand sanction the parties subject to its oversight.

In fulfilling its mission, the ACPR takes into account the objectives offinancial stability across the European Economic Area (EEA) and consistentapplication of European and domestic regulations as well as best practicesand recommendations issued by European regulatory authorities. Inparticular, within the EEA, the ACPR assists European authorities insupervising cross-border institutions.

HCSFThe HCSF is a consultative body composed of the minister of finance, thegovernor of the Banque de France (also chairman of the ACPR), the vice-chairman of the ACPR, the chairman of the Autorité des marchés financiers(AMF, the capital markets regulator), the chairman of the Autorité des normscomptables (ANC, the accounting board), and three financial experts.

The HCSF monitors the financial system as a whole, with a view tomaintaining its stability and its capacity to make a sustainable contributionto economic growth. The HCSF defines macro-economic policy and isnotably responsible for: • ensuring exchanges of information and facilitating cooperation between

the various authorities that it represents, including the ministry offinance, the Banque de France, the ACPR, the AMF and the ANC;

• identifying and assessing the nature and extent of systemic risk resultingfrom the financial sector taking into account advice and

recommendations of the European authorities;• formulating advice and recommendations with a view to preventing

systemic risk and any threat to financial stability, which it may makepublic;

• requiring certain institutions (including credit institutions andinvestment firms) to comply with (i) a counter-cyclical buffer and (ii) asystemic risk buffer, upon the proposal of the governor of the Banquede France;

• taking the measures provided by article 458 of the CRR upon theproposal of the governor of the Banque de France; and,

• issuing any advice to competent European authorities recommendingthe adoption of measures necessary for the prevention of any systemicrisk threatening the financial stability of France.


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?Yes.

The document entitled ’Capital instruments issued by EU member statesqualifying as CET1 by virtue of article 26(3) of the CRR‘, published byEBA on May 28 2014, lists (i) common shares issued under articles L. 228-6 et seq. of the French commercial code and (ii) certain cooperativeinvestment shares (parts sociales) and cooperative investment certificates(certificats cooperatifs d’investissement) issued by mutuals under Frenchcooperative law n°47-1175 of September 10 1947 as instruments qualifyingas CET1, respectively under articles 28 and 29 of the CRR. The EBA listdoes not however contain an exhaustive list of all instruments that mayqualify as CET1 in each jurisdiction. It will be updated continuously. Themost recent ACPR guidance on capital requirements, dated August 6 2014(ACPR Guidance), mentions that CET1 comprises the institution’s sharecapital without limiting it to ordinary shares. Accordingly, preferred sharesissued under article 228-11 et seq. of the French Commercial Code (actionsde preference), which are part of the institution’s share capital, may be ableto qualify as CET1 provided that they meet all the requirements of article28 of the CRR (and in particular, are perpetual, non-redeemable andprovide full loss absorbency and full flexibility of payments).

2.2 What instruments qualify as AT1 capital?Under the ACPR Guidance, AT1 comprises perpetual debt instruments,provided they (i) do not have step-up or other repayment requirements orincentive mechanisms, (ii) have a loss absorption mechanism (conversioninto shares or principal reduction) which is triggered when the CET1 ratiobecomes lower than a certain threshold which is at least 5.125%, and, (iii)provide full flexibility of payments (automatic payments are prohibited andthe issuer must have discretion to suspend coupons).

Note that French banks such as Société Générale and Crédit Agricole haveissued AT1 instruments in 2014.

France

Amélie Champsaur, Cleary Gottlieb Steen & Hamilton

www.cgsh.com

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3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation?Buffer requirements are implemented in the French Monetary and FinancialCode (modified through the Ordinance 2014-158 of February 20 2014).Phasing-in provisions are set out in the ACPR Guidance.

Buffers • Capital conservation buffer, set at 2.5% of the total risk exposure

amount.• Counter-cyclical buffer, which may be imposed by the HCSF in cases

of excessive credit growth (notably in cases of a deviation of thecredit/GDP ratio); this institution-specific buffer would be set in therange of 0% to 2.5% of the total risk exposure amount (although it maybe higher in certain circumstances). The HCSF will also set, on aquarterly basis, the counter-cyclical buffer rate applicable to exposureslocated in France, which will be taken into account for purposes ofsetting the average counter-cyclical buffer rate under article 140 of CRDand the institution-specific buffer mentioned above.

• Sifi buffer, which will be set by ACPR in the range of 1% to 3.5% forglobal Sifis and 0% to 2% for other Sifis.

• Systemic risk buffer, which will be set by the HCSF and is not cappedbut is expected to be generally in the range of 1% to 5%, but may applyto only part and not all of the risk exposures (for instance, it may applyto domestic exposures only). The purpose of the systemic risk buffer isto prevent and limit non-cyclical long-term systemic or macro-prudentialrisks. For these purposes, ’systemic risk‘ is defined as a risk of disruptionof the financial system such that it may have grave repercussions on thefinancial system as well as the real economy.

Compliance with buffers and distributions• An institution that complies with applicable combined buffer

requirements may not distribute any amount that would reduce theamount of own funds to a level that no longer enabled it to meet thecombined buffer requirements.

• An institution that does not comply with applicable combined bufferrequirements is prohibited from: - making any distribution in relation to CET 1 instruments;- making any payment in relation to AT1 instruments; or,- undertaking to pay or paying discretionary pensions or variable

remuneration, except if the obligation to pay arose before theviolation of the applicable combined buffer requirements.

• As an exception to the foregoing, an institution that does not complywith applicable combined buffer requirements but calculates its MDAmust comply with the above prohibition only with respect todistributions that would exceed the MDA. The requirements of article141 of CRD IV in relation to the calculation of MDAs and disclosuresto the regulator in connection with those calculations have beenimplemented as a matter of French law by the order of November 32014.

• For purposes of the above prohibitions, ’distributions‘ include: - cash dividends;- bonuses in the form of shares or other CET1 instruments;- any repayment or repurchase of shares or other CET1 instruments;- any repayment of sums paid-in in connection with CET1

instruments; and,- any payment of other components of CET1.

• The above-mentioned prohibitions on distributions do not apply if theirapplication would be considered under relevant insolvency regimes as anevent of default or as triggering the opening of an insolvency procedure.

• An institution that does not comply with the combined bufferrequirements must prepare and submit to the ACPR a capitalconservation plan. If the ACPR does not approve the plan, it will imposeat least one of the regulatory intervention measures available to it

(including the requirement for the institution to take within a specifieddeadline all measures to restore or strengthen its solvency or liquidity,improve its management methods or ensure the adequacy of itsorganisation in light of its activities and development objectives, toincrease its own funds, to allocate all or part of net earnings to thestrengthening of own funds, to limit on variable remuneration in theform of a maximum percentage of net earnings, to publish additionalinformation, to prohibit or limit the distribution of a dividend toshareholders or holders of mutual shares or certificates or to prohibit orlimit the payment of coupons to holders of AT1, except if thatprohibition or limitation could be considered an event of default of therelevant institution).

Entry into forceIt is contemplated that the buffer requirements will come into forcegradually and at the latest by January 1 2019. Specifically, the ACPRGuidance contemplates that:• the systemic risk buffer may be put in place as from 2014 by increments

of 0.5%, upon the decision of the HCSF; and,• the conservation, counter-cyclical and Sifi buffers will start applying as

from 2016 and until 2019 by annual increments of 25% of themaximum applicable buffer rate.

3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?Under the ACPR Guidance, the capital trigger in place for AT1 securitiesis a CET1 of 5.125%.

3.3 How is the PONV defined in your jurisdiction?For purposes of the French resolution regime implemented by law 2013-672 of July 26 2013 (the FRR), the ACPR may implement a resolutionmeasure if it considers that the relevant institution is failing, and that thereis no prospect that this failure can be avoided within a reasonable time framewithout the adoption of a resolution measure. For these purposes, aninstitution is deemed to be failing if there are objective elements showingthat it may in the near term find itself in one of the following situations: (i)it does not comply with the own funds requirements necessary to maintainits licence, (ii) it is not able to meet its payment obligations in the near term,or, (iii) it requires exceptional public support.

The FRR is not fully compliant with the BRRD, however. A new law orordinance modifying the FRR to fully implement the BRRD is expected tobe adopted by the end of 2014 and to enter into force during the course of2015.

3.4 What are the grandfathering provisions and how are theyimplemented?Under the ACPR Guidance and the decision 2013-C-110 of the ACPR ofNovember 12 2013 relating to national options regarding CRRimplementation (the ACPR Option Decision), the main transitional andgrandfathering provisions are as follows. • CET1: 4% for 2014 and 4.5% thereafter.• Tier 1: 5.5% for 2014 and 6% thereafter.• Buffers: see question 3.1.• Deductions will be phased-in progressively:

- net losses, insufficient provisions for expected losses and intangibleassets will be fully deducted in accordance with the CRR as from2014;

- deductions of deferred tax assets will be phased-in over a 10-yearperiod;

- other deductions required under the CRR will generally be phased-in over a five-year period (banks will be required to deduct 20% ofthe amount of deductions calculated in accordance with the CRR in2014, increasing to 40% in 2015, 60% in 2016, 80% in 2017 and100% thereafter).

• Latent capital gains and losses: latent capital gains will be excluded from

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CET1 in 2014, and progressively included thereafter (40% in 2015,60% in 2016, 80% in 2017 and 100% thereafter). Conversely, latentcapital losses will be fully included as from 2014. Both gains and losseson sovereign securities will remain excluded from own funds to avoidvolatility.

• Instruments that no longer qualify as own funds will be progressively’de-recognised’ over an eight-year period (80% will remain recognisedin 2014, 70% in 2015, and so on). The ’de-recognised‘ portion of aninstrument may still qualify as own funds of a lower category (AT1 toTier 2, for instance).

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding?Under prevailing law, institutions that calculate their capital requirementsfor market risk based on internal models are required to conduct stress testsand communicate the results to the ACPR. The ACPR may also requestthese institutions to carry out stress tests based on criteria defined by theACPR. The results of these tests are not required to be made public.

As a result, the only stress tests with respect to French banks whose resultshave been or will be made public at this stage are those conducted atEuropean level by the EBA and ECB.

Note that the ACPR may exercise certain regulatory intervention powers ifan institution fails the EBA stress tests. In particular, if an institution notifiesthe ACPR under article 377(5) of the CRR that the stress test resultsmaterially exceed the own funds requirement for the correlation tradingportfolio, the ACPR may require the institution to hold own funds in anamount greater than the minimum required under applicable law, andrequest the application of a specific provisioning or capital treatment.

Note also that, on April 16 2014, the Banque de France announced that ithad successfully conducted a market-wide liquidity test with respect to thefinancial sector (see announcement: https://www.banque-france.fr/fileadmin/user_upload/banque_de_france/Stabilite_financiere/CP-BDF-2014-04-16-test-cible-de-crise-reussi.pdf ).

4.2 Which national body is conducting the tests?The ACPR is supervising the stress tests described under question 4.1 andhas certain regulatory intervention powers in connection with EBA stresstests (see above, question 4.1).

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?All institutions that calculate their capital requirements for market risk basedon internal models are required to carry out the stress tests described inquestion 4.1.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?Issuers of AT1 and/or Tier 2 instruments issued in France have indicated intheir prospectuses that they consider the coupons to be deductible as ageneral matter, subject to certain conditions described in their prospectuses.

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?Issuers of AT1 and/or Tier 2 instruments issued in France have indicated intheir prospectuses that they consider the coupons would not be subject towithholding tax as a general matter when paid to non-residents, subject tocertain conditions described in their prospectuses. Specific rules apply topayments made to French tax resident individuals.

6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction? There has been no amendment to the French tax rules in connection withthe treatment of AT1 and Tier 2 securities. The tax analysis derives fromthe application of general tax principles.


7.1 What type of loss absorbency features are/ will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?The ACPR Guidance contemplates that:• AT1 comprises perpetual debt instruments that (i) do not have step-up

or other repayment requirements or incentive mechanisms, (ii) have aloss absorption mechanism (conversion into shares or principalreduction) that is triggered when the CET1 ratio becomes lower than acertain threshold which is at least 5.125%, and, (iii) provide fullflexibility of payments (automatic payments are prohibited and the issuermust have full discretion to suspend coupons); and,

• Tier 2 comprises subordinated debt instruments with a minimum termof five years and that have no early repayment incentives; no lossabsorbency features are required.

Features of AT1 and Tier 2 instruments (including loss absorbency features)are not further defined as a matter of French law or under the ACPRGuidance.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?Under the ACPR Guidance, AT1 instruments are required to be loss-absorbing while Tier 2 instruments are not. Note that French banks (forinstance BPCE) have issued Tier 2 instruments in 2014 that do not haveloss absorbency features.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?Yes. • Full discretion on coupon payments is one of the requirements for

securities to qualify as AT1 (see question 7.1).• Payment of coupons on AT1 instruments is prohibited if combined

capital buffers are not complied with and MDA is not calculated (and,if MDA is calculated, with respect to any payments in excess thereof.)(See question 3.1 regarding compliance with buffer requirements).

• The ACPR may, as part of its regulatory intervention powers, prohibitor limit the payment of coupons on AT1 instruments in cases where thesolvency or liquidity of the institution, or the interests of its clients, areor may be compromised, or if the information received or requested bythe ACPR evidences that the institution is likely to be in breach within12 months of the CRR or French prudential requirements (except if thatprohibition or limitation could be considered as an event of default ofthe relevant institution).

8.2 How are MDAs calculated, and what happens in case of abreach?The requirements in relation to the calculation of MDAs and disclosures tothe regulator in connection with that calculation have been implementedas a matter of French law by the order of November 3 2014 in line with therequirements of Article141 of CRD IV.

See question 3.1 regarding compliance with buffer requirements.

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9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?There is no indication as a matter of French law or the ACPR Guidancethat the leverage ratio will be implemented sooner than required under BaselIII/CRD IV.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?The ACPR Guidance does not take a specific position on this. Note howeverthat it refers to the leverage ratio as ‘measuring the ratio between Tier 1 andtotal exposures, including on-balance sheet assets, notably derivatives andrepo arrangements, as well as off-balance sheet’.

10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements?The ACPR Guidance does not contain specific indications in this respect.See question 2 in relation to CET1 instruments issued by mutuals. Notethat French mutual banks such as Crédit Agricole and BPCE have issuedAT1 and/or Tier 2 instruments in 2014.

10.2 Have additional rules and regulations been issued in relationto Sifis?The French Monetary and Financial Code defines the criteria to be used bythe ACPR for the designation of ‘Global Sifis’ and ‘Other Sifis’, notably forpurposes of the combined buffer requirements.

The ACPR has designated BNP Paribas, BPCE, Société Générale and CréditAgricole as Global Sifis (ACPR decision of June 26 2014).


11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?The most notable intervention of the French state is the restructuring ofDexia in conjunction with the Belgian and Luxembourg states starting inOctober 2008. This involved notably a series of recapitalisations, stateguarantees on debt issuances and restructuring measures.

Another example of public intervention was the creation by the French statein 2008 of two public intervention tools in order to prevent bank failuresand address the credit crunch resulting from the 2008 financial crisis:

- the SFEF (Société de financement de l'économie française), an entityowned by the French state (34%) and a group of banks, the purpose ofwhich was to issue state-guaranteed debt and use the proceeds torefinance banks, and to incite banks to provide financing to the realeconomy (2008 to 2009); and,

- the SPPE (Société de Prise de Participation de l'État), an entity wholly-owned by the French state, the purpose of which was to participate inthe recapitalisation of banks, in exchange for an undertaking on the partsof the beneficiaries to (i) provide financing to the real economy and (ii)comply with certain ethical and governance requirements. In 2009, theSPPE provided capital injections to the main French banking groups inthe form of deeply subordinated debt and preference shares, which havesince then been redeemed.

Note that the above cases are examples of public intervention measures,decided by the government and implemented on the basis of legislative acts,not regulatory interventions by the ACPR on the basis of its supervisionand enforcement powers, although the ACPR was of course involved in theimplementation of these measures.

12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?Requirements in terms of prudential supervision and evaluation of riskshave been enacted by the order of November 3 2014 in line with articles77, 78, 97 to 109 of CRD IV.

12.2 If so, what are the disclosure requirements around pillar 2, ifany? See question 12.1.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?Not at this stage. However, the ACPR Guidance provides some indicationsas to how it will interpret the notion of ’significant risk transfer‘ for purposesof securitisations.


15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?No. A simplified French resolution regime, in line with the overall principlesand objectives of the BRRD, has been implemented by the law 2013-672of July 26 2013 (the FRR). The FRR is not fully compliant with the BRRD,however. A new law or ordinance modifying the FRR to fully implementthe BRRD is expected to be adopted by the end of 2014 and to enter intoforce during the course of 2015.

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?Under the FRR, the ACPR ensures that shareholders and creditors do not,in the context of resolution, incur losses greater than those that they wouldhave incurred in the context of normal insolvency proceedings. For thesepurposes, the assessment of losses that would have been incurred in thecontext of normal insolvency proceedings takes into account the realisationvalue of assets as of the date on which the institution was notified of theresolution measure.

16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?N/A

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About the authorAmélie Champsaur is a partner of Cleary Gottlieb Steen & Hamilton.Her practice focuses on M&A, capital markets and financialtransactions, particularly in the financial sector. She also advises clientson a broad range of EU financial regulatory, governance andcompliance matters, as well as cross-border aspects of the Dodd-Frankreforms. She was recently recognised as one of the ’40 under 40 RisingStars‘ for legal services in the EU.

Amélie ChampsaurPartner, Cleary Gottlieb Steen &Hamilton

Paris, FranceT: +33 1 40 74 68 00E: [email protected] W: www.cgsh.com


1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?The German Federal Financial Supervisory Authority (Bundesanstalt fürFinanzdienstleistungsaufsicht, BaFin) and the German Federal Bank(Bundesbank) are in charge of, among other things, supervising creditinstitutions and investment firms in Germany. As of November 4 2014, theEuropean Central Bank (ECB) took over from BaFin and the GermanFederal Bank the supervision of German credit institutions under the singlesupervisory mechanism (SSM). The ECB is in charge in particular of thedirect supervision of significant German credit institutions. The supervisoryfunction of the ECB should be limited to bank regulatory supervision. Itshould not expand to the Market in Financial Instruments Directive(MiFID) or the Market Abuse Directive (MAD), for example. However,the details of the SSM yet need to be clarified and still give rise to numerousunanswered questions.


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?The Basel III proposals have been implemented in the EU throughregulation (EU) 575/2013 (the Capital Requirements Regulation, CRR),which is directly applicable in all member states, and directive 2013/36/EU,which has been effected in German law through the act implementingdirective 2013/36 EC (the whole package referred to as ’CRD IV’).

Under the CRR, CET1 consists of the following items: (a) eligible capitalinstruments; (b) share premium accounts related to those instruments; (c)retained earnings; (d) other accumulated comprehensive income; (e) otherreserves; and, (f ) funds for general banking risk. From CET1 items, amongother things, deferred tax assets that rely on future profitability need to bededucted. However, that deduction is subject to transitional rules. A 100%deduction will only be mandatory in 2018 for items created in 2014 andlater, and in 2024 for items that already existed before 2014.

With regard to the CRR, the European Banking Authority (EBA) haspublished a list of all the forms of eligible capital instruments that qualifyas CET1 instruments in Germany. According to this list, the followinginstruments are recognised as CET1 in Germany (in addition tograndfathered instruments): subscribed capital of cooperatives(Geschäftsguthaben), shares of the limited and general partners in the paid-up capital of partnerships (OHG-Anteile, Komplementärkapitaleinlage,Kommanditanteile), shares of a partnership limited by shares(Kommanditaktien), and, silent participations (Vermögenseinlage stillerGesellschafter).

Capital instruments issued by German savings banks (Sparkassen) andcooperative societies (Genossenschaftsbanken), in each case as described inthe Commission Delegated Regulation (EU) No 241/2014, under theirstatutory terms qualify as CET1 if they comply with the conditions set outin articles 28 et seq. of the CRR.

2.2 What instruments qualify as AT1 capital?Save for transitional rules, all instruments in compliance with therequirements set out in articles 50 et seq. of the CRR.


3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation?Germany has introduced combined buffer requirements in sections 10c etseq. of the German Banking Act (Kreditwesengesetz, KWG) consisting of acapital conservation buffer (section 10c KWG), a counter-cyclical buffer(section 10d KWG), a systematic risk buffer (section 10e KWG), a G-SIIbuffer (section 10f KWG), and an O-SII buffer (section 10g KWG). OnlyCET1 counts towards the capital buffer. In addition, in line with article 458CRR, additional capital requirements might for example be imposed if amacro-prudential or systemic risk has been identified for Germany. Retailbanks are not subject to special buffer requirements.

The capital conservation buffer, the counter-cyclical buffer, and the G-SIIbuffer will phase in from 2016 onwards and will be fully applicable in 2019.The O-SII buffer will be fully applicable as of January 1 2016. The systemicrisk buffer can already be applied.

Under local law, institutions require BaFin’s acceptance of their capitalconservation plan before they can make distributions decreasing CET1 toa level where the combined buffer requirement is no longer met in line withthe minimum distributable amount (MDA) they have calculated.

Germany has enacted rules on the ring fencing of risks (split-bank regime)which will enter into force in July 2015. The regime does not specificallyaddress retail banks. Under the German regime on the ring fencing of risks,banks which both grant loans and take deposits (credit institutions), as wellas their financial groups, will be obliged to cease rendering certain servicesif the financial group exceeds predefined thresholds. Within the financialgroup, those services may then only be rendered by a financial tradinginstitution (Finanzhandelsinstitut).

3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?As for AT1 securities, Germany solely relies on the capital triggers set forthin the CRR (that is, a CET1 capital ratio of at least 5.125%; a higher ratioapplies if securities are also eligible for variable remuneration). German lawdoes not provide for additional rules relating to retail banks in this context.

3.3 How is the PONV defined in your jurisdiction?German law does not yet define a local law specifically relating to PONVqualifying as a mandatory trigger event for capital instruments (that is,resulting in the write-down/conversion/cancellation of capital instruments).

3.4 What are the grandfathering provisions and how are theyimplemented?With regard to the grandfathering of capital instruments, the provisions ofthe CRR apply.

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Germany

Bernd Geier and Dirk Eisel, Allen & Overy

www.allenovery.com

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4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding?The KWG provides for the power to conduct stress tests. The result of stresstests will be taken into account by the regulator(s), in particular whenexercising regulatory measures. Save for stress tests being part of the ECB’sComprehensive Assessment, no other stress tests have been publiclyannounced by BaFin.

4.2 Which national body is conducting the tests?Save for the provisions of the SSM, BaFin is authorised to conduct stresstests; it may involve the German Federal Bank.

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?Banks subject to the stress test under the KWG will be determined on acase-by-case basis. The list of German banks which participated in the EU-wide stress test is available on the EBA’s website.

4.4 How does the AQR feed into your jurisdiction’s stress tests(where relevant?)The AQR and the EU-wide stress test were part of the ECB’s ComprehensiveAssessment.

5. Bank Supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all? BaFin to a large extent has been deprived of its powers. On November 42014, the ECB took over supervision of German credit institutions underthe SSM. As of that date it exercises direct supervision over significantGerman credit institutions.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?It is too early to predict how the JST will actually work in practice.

5.3 How will they impact the implementation of revised capital plansfollowing stress tests?We believe capital plans will become subject to intense scrutiny, in particularas banks have been subject to the Comprehensive Assessment. However, itis too early to predict the impact of the new regulatory landscape on thefinancial industry.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?In a letter ruling dated April 10 2014, the ministry of finance confirmedthat coupon payments on AT1 instruments (both write-down andcontingent conversion instruments) which are based on model terms andconditions published by the Association of German Banks (Bundesverbanddeutscher Banken) (German AT1 Model Terms), are tax deductible as interestexpense.

The deductibility of coupon payments on instruments not based on theGerman AT1 Model Terms remains uncertain and will need to be assessedon a case-by-case basis.

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?In the letter ruling, the ministry also clarified the withholding tax treatmentof coupon payments on AT1 instruments based on the German AT1 ModelTerms (German AT1 Model Instruments), confirming that (i) no tax is tobe withheld in respect of coupon payments on German AT1 ModelInstruments held by a non-German tax resident investor, and, (ii)

withholding tax does apply on such instruments held by German taxresident investors, and will be deducted by the German branch of the bankwhere the custody account is kept and the relevant AT1 instruments areheld. The withholding tax treatment of coupon payments on instrumentsnot based on the German AT1 Model Terms remains uncertain and willneed to be assessed on a case-by-case basis.

6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction? Apart from the statements in the letter ruling, no tax laws (or theinterpretations thereof by competent authorities) have been changed, norare they expected to change to enhance the tax efficiency of AT1 and T2securities in Germany.

6.4 What is the tax treatment in terms of the capital gains on a writedown or conversion?In the letter ruling, the ministry confirmed that for German AT1 ModelInstruments, in the case of a write-down, the amount written down leadsto a fully taxable gain at the level of the issuing bank and, correspondingly,any subsequent write-up leads to tax-deductible expenses.

In the case of a conversion of a contingent conversion German AT1 ModelInstrument, the ministry has held that this creates a taxable gain to theextent that the fair market value of the instrument falls below the nominalvalue at the time of conversion. For example, if a bank has issued acontingent conversion German AT1 Model Instrument with a nominalvalue of 100, the fair market value of which has decreased to 70 by the timeof conversion, the conversion of the instrument would lead to taxable profitof 30, this being the difference between 100 and 70.


7.1 What type of loss absorbency features are/ will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?Loss absorbency features of AT1 and T2 will (before the implementation ofthe BRRD in Germany) follow the CRR. To this end, only AT1 providesfor going concern loss absorption (see 3.2 above). Both AT1 and T2 providefor gone concern loss absorption (as they qualify as subordinated debt).

Once the BRRD has been implemented in Germany (likely on January 12015), shareholders and holders of other instruments of ownership,including AT1 and T2 instruments, will be the first stakeholders tocontribute to the resolution by means of a mandatory writedown/cancellation/conversion of their instruments, taking account of theranking of these instruments in insolvency proceedings. The ‘no creditorworse off than under normal insolvency proceedings’ principle will apply.Against the background of recovery rates of instruments of ownership inrecent insolvency proceedings, a complete cancellation of all instruments ofownership may seem a realistic outcome. The contribution made byshareholders and holders of other instruments of ownership will serve toavoid the opening of insolvency proceedings (at least over the systemicallyimportant parts of the institution). To this end, from 2015 onwards, it couldbe argued that all capital instruments provide for some form of goingconcern loss absorption, at least from an economic perspective.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?Yes, but only in a gone concern situation.

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8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?Beyond the CRR and save for resolution, the KWG empowers BaFin tolimit a German institution’s discretion to pay coupons/dividends on ownfunds instruments. Broadly speaking, BaFin may exercise this power if ithas doubts as to the institution’s ability to permanently comply with certainregulatory requirements, in particular liquidity and capital requirements.This might, for example, be the case in a large decrease of the own fundsratio (even though the institution might still comply with combined bufferrequirements).

8.2 How are MDAs calculated, and what happens in case of abreach?In cases where BaFin exercises its power described under 8.1 above,discretionary payments/distributions may be limited to the institution’sannual net income. German law does not provide for clear guidance on howthe MDA is calculated in this context (but there are detailed rules on thecalculation of the MDA, if the combined buffer requirement as set forth inCRD IV and implemented under German law is not met).

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?Under the KWG, institutions are obliged to report to BaFin changes to theirleverage ratio of 5% or more (based on KWG-specific calculationmethodology). This rule already existed before the implementation of CRDIV. Germany does not plan an early implementation of leverage provisionsunder the CRR, applicable on top of the 5% rule.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?Under the 5% rule, the issuance of AT1s has an impact on the leverage ratio,even though only marginally as AT1s usually count towards the ratio’snumerator and denominator.

10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements?The provisions of the CRR dealing with mutuals and cooperative societies(each as described in the RTS Delegated Regulation) apply in Germany, inparticular articles 27 et seq. of the CRR.

10.2 Have additional rules and regulations been issued in relationto Sifis?Yes, Sifis are, for example, subject to German recovery and resolutionplanning.

We expect only Deutsche Bank to qualify as G-SII in Germany. We alsoexpect the regulator to publish a list of O-SII for capital buffer purposes atthe latest by the end of 2015. G-SIIs and O-SIIs need to comply with theG-SII and O-SII buffer requirements outlined above. Many institutionshave already been informed that they qualify as systematically important(for example, for the purpose of the recovery and resolution regimeapplicable in Germany).

German banks are obliged to prepare a recovery plan if they are classifiedby the BaFin as posing a potential risk to the stability of the financial system(systemically important). Under a draft legislative package published by theGerman government on July 9 2014, among other things implementing theBRRD as of January 1 2015, the requirement to prepare a recovery planwill be expanded to generally cover all German banks and investment firms.However, under the new rules, recovery plans will be prepared primarily at

group level by the respective union parent undertaking (in its home memberstate). A separate recovery plan for individual German subsidiaries will onlybe necessary in specific cases. This will particularly affect German banksthat are subsidiaries of other institutions within the EU. For Germansubsidiary banks/investment firms of undertakings outside the EU/EAA,the legislative package suggests – at least initially – a general obligation toprepare a recovery plan (at the subsidiary level). In this regard, however,extensive relief can be expected for non-systemically important subsidiaries,for example, with respect to the contents of the plan. The draft legislationprovides for a potential exemption of banks that belong to an institutionalprotection scheme (Institutssicherungssystem) from the obligation to preparea recovery plan. This might become relevant for German savings banks(Sparkassen) and co-operative banks (Volksbanken).

Further, the resolution tool of a transfer order is only available to a Sifi. Thistool serves functions similar to the sale of business/bridge institution toolsunder the BRRD (which will only be implemented as of January 1 2015).The provisions have already been implemented and do not distinguishbetween G-SIIs and O-SIIs.

Please note that Germany has implemented rules on the ring-fencing ofrisks which will enter into force in July 2015 (subject to transitional rules).Even though strictly speaking from a legal point of view, these rules do notexplicitly require a bank to be systematically important in order to fall withinthe scope of the ring-fencing regime, factually, only systematically importantbanks are likely to be caught by the provisions.


11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?None of the regulatory intervention powers newly introduced in 2011 underthe German Restructuring Act (Restrukturierungsgesetz) have ever beenpublicly applied. This in particular applies to the transfer order tool(Übertragungsanordnung), an instrument similar to the sale ofbusiness/bridge institution tools under the BRRD. Before 2011, BaFin, forexample, imposed a moratorium on Lehman Brothers Bankhaus. However,we believe that BaFin would not apply a moratorium to an Sifi anymore,but would rely on the untested intervention powers introduced in 2011.The transfer of impaired assets, rights, and liabilities of HRE and WestLBto Abwicklungsanstalt (a winding-up agency) only took place with theconsent of the banks concerned. The nationalisation of HRE ultimately didnot involve regulatory, but only company law measures (such as, forexample, a squeeze-out).

12. Disclosure

12.1 Save for capital buffers, does local regulation specify pillar 2requirements, and what are those?Yes, most of the rules can be found in sections 25 et seq. of the KWG andthe minimum requirements for risk management (Mindestanforderungen andas Risikomangement, MaRisk). German law provides for detailed guidanceon pillar 2 requirements, in particular on the joint responsibility of themanagement board, general risk management requirements, organisationalduties, documentation, resources, outsourcing, and so on. Those rules arein many respects stricter than the CRD IV framework. When implementingCRD IV, Germany has, for example, amended its provisions governingvariable remuneration.

12.2 Are there any disclosure requirements with regard to the newcapital buffer requirements? Once the new capital buffers start phasing in, information on thecompliance of an institution and its group with these requirements will bemade publicly available.

Under article 440 of the CRR, institutions will be obliged to discloseinformation on their compliance with the requirements of a countercyclical

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capital buffer. Furthermore, institutions identified as G-SII must discloseannually the values of the indicators used for determining their scores inaccordance with the identification methodology. The regulator will discloseany G-SII buffer imposed. The regulator will also publish a list of all O-SIIs(to which we understand the O-SII buffer will apply) and information onany systemic risk buffer imposed.

As institutions are obliged to publish their CET1 ratios on a solo and groupbasis, market participants will be able to assess compliance with all applicablebuffer requirements. However, we would also expect institutions to directlyaddress compliance with capital buffer requirements in the annual reports.Local law provisions under pillar 2 primarily focus on notifications to theregulator, and not on disclosure. However, disclosure of compliance withpillar 2 requirements is mandatory under the CRR, for example, in relationto variable remuneration.

Pillar 2 requirements, for example, do not provide for disclosurerequirements specifically addressing road shows. However, broadly speaking,in any road show an adequate and complete picture needs to be presentedto mitigate/eliminate civil law liability. When capital instruments aremarketed, the risks associated with the capital instruments must usually bedisclosed, including information on trigger events and buffer requirementswhere relevant for the instruments’ risk profile. Conflicts of interest needto be managed. To this end, BaFin has asked institutions to reconsider thegroup of clients to which they actually market certain capital instruments(in particular contingent convertibles). Where the provision of a road showby itself qualifies as the provision of an investment service/activity, the rulesgoverning the service/activity will apply to the road show (so that, forexample, a disclosure of fees and costs might be required) for regulatoryreasons, as well.


13.1 Article 78 of the CRR specifies a number of reasons for earlyredemption, including changes in the regulatory classification andapplicable tax treatment. Does local regulation elaborate on this, oradd any other provisions that would allow for early redemption?No. At the moment, German law exclusively relies on the CRR, in particulararticle 78 of the CRR.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?No, since January 1 2014, only the CRR applies. BaFin will, however, aimat upholding its formerly-developed administrative practice to the extentthat it is in line with the CRR.


15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?On July 9 2014, the German government published a draft legislativepackage, among other things, implementing the BRRD as of January 12015. The legislative package has not yet passed parliament. We expect thebill to pass parliament and be published in the federal gazette before theend of the year.

Planned impact of the BRRD/SRM on the resolution authority inGermanyBased on the legislative package, on January 1 2015 BaFin will loseresponsibility for bank resolution, at which point the Federal FinancialStability Authority (Bundesanstalt für Finanzmarktstabilisierung, FMSA) willbecome the competent national resolution authority. This authority will,however, only partially remain with the FMSA, as resolution planning andthe right to pass a resolution decision for most German banks will later be

transferred to a yet-to-be established EU agency, the so-called SingleResolution Board (SRB). The SRB will be able to fully exercise its functionsand powers from 2016 onwards.

Planned implementation of the BRRD in GermanyAccording to the legislative package, the bail-in tool is expected to beimplemented in Germany on January 1 2015, in other words, ahead of theJanuary 1 2016 implementation date required by the BRRD. Before theimplementation of the BRRD, German law does not provide for a unilateralbail-in tool. It has been argued though that a (partial) transfer order could– from an economic perspective – have effects for creditors similar to a bail-in. However, strictly speaking from a legal point of view, any such transferorder would not directly affect the creditor’s entitlement and it is yet to bedemonstrated that it would actually be capable of achieving such effects.

From 2015 onwards, institutions must, at all times, meet a minimumrequirement for own funds and eligible liabilities to ensure feasibility of abail-in. The minimum requirement will be calculated as the amount of ownfunds and eligible liabilities expressed as a percentage of total liabilities andown funds of the institution.

Planned amendments to the provisions governing public financial supportin GermanyGermany also plans to amend the rules governing (extraordinary) publicfinancial support. The German Special Financial Market Stabilisation Fund(Sonderfonds Finanzmarktstabilisierung, SoFFin) was set up on a temporarybasis back in 2008. It is financed by a public budget and has grantedfinancial support to numerous institutions in Germany since then. Underthe legislative package the SoFFin will not be dissolved at the end of 2014as scheduled, but rather, at the end of 2015. We expect the SoFFin to befactually replaced by the European Stabilisation Mechanism (ESM) in 2016;however this is as yet rather unclear. The German legislator’s consent to thepreviously-agreed introduction of the new ESM tool of direct bankrecapitalisation is a component of the legislative package.

Planned implementation of the SRM in GermanyBy 2016 at the latest, the FMSA will be partially deprived of its resolutioncompetency, as resolution planning and the right to pass a resolutiondecision for most EU banks will be transferred to the SRB under regulation(EU) No 806/2014 establishing the framework of a Single ResolutionMechanism and a Single Resolution Fund (SRM Regulation). The legislativepackage still needs to be harmonised with the SRM Regulation.

Based on the SRM Regulation, the SRB will be in charge of the resolutionof (i) all banks under direct ECB supervision, (ii) all banks engaged in cross-border activities, and, (iii) banks which receive/require funds from the ESM.In these cases, national resolution authorities (in Germany, the FMSA),therefore, will be responsible only for the implementation of decisions madeby the SRB.

The SRM will heavily impact on recovery and resolution planning withinthe EU as it is likely to result in a two-zone approach, distinguishingbetween eurozone member states (and some additional countries that alsochose to join the SRM) on the one hand, and the rest of the EU on theother. This effect might have an impact in particular on banks that accessthe eurozone through member states not participating in the SRM. Inparticular, third country banks should be aware of this effect whenconsidering where to implement their European hub(s), also taking accountof the bank levy (outlined below) and the local rules on the ring fencing ofrisks to which they might be subject in the different member states.

Planned amendments to the German bank levySince 2011, German law has provided for a so-called restructuring fund(Restrukturierungsfonds) financed by a bank levy (Bankenabgabe). The fundwill be adjusted to reflect the BRRD. To this end, it will become part of aEuropean system of financing arrangements which, among other things,will provide for borrowings between national financing arrangements and a

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mutualisation of national financing arrangements in the case of a groupresolution.

The legislative package also contains a draft act on the ratification of theintergovernmental agreement of May 21 2014, which fosters from 2016onwards the conversion of national financing arrangements into a single,European resolution fund of the eurozone (Single Resolution Fund, SRF).Each participating national financing arrangement will initially qualify as acompartment of the SRF. The SRF will provide for limited ring-fencing ofrisks between the compartments. However, between 2016 and 2024, thatpartial ring-fencing will fade out and all compartments will ultimately bedissolved.

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?German authorities have not issued any guidance on how valuation will takeplace at the PONV.

16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?To the extent German law already provided for rules stricter than thoseunder CRD IV (or under transitional rules applicable to CRD IV), theGerman legislator has generally chosen not to repeal those rules. To this end,for example, BaFin’s discretionary power to impose a counter-cyclical bufferhas not been repealed and will continue to apply in 2015 (that is, by thetime the newly-introduced counter-cyclical buffer under CRD IV will startphasing in). Furthermore, it should be noted that the German legislatorused the implementation of the CRD IV to readjust the German regulatoryframework in ways which were not necessarily induced by CRD IV. A veryprominent example in this context is the new rule governing intra-groupexposures. Germany has also chosen to apply many parts of CRD IV mutatismutandis to institutions not directly falling within its scope.

About the authorDr. Bernd M. Geier is a German rechtsanwalt, and solicitor (England &Wales) in Allen & Overy’s international capital markets practice. Heparticularly focuses on CRD IV, MiFID (II), EMIR and Solvency II.His practice includes bank M&A transactions, the structuring of capitalinstruments, funds and other products for regulatory purposes, as wellas the clearing and settlement of financial instruments. He also lectureson banking supervisory law and restructuring at the University ofAdministrative Sciences in Speyer.

Bernd GeierCounsel, Allen &Overy

Frankfurt, GermanyT: +49 69 2648 5965 E: [email protected] W: www.allenovery.com

About the authorDirk Eisel, a German rechtsanwalt, joined Allen & Overy in 2012. Hepreviously worked with an international law firm in Frankfurt andSingapore. Dirk specialises in advising banks, insurance companies andadvises on corporate issues in connection with capital marketstransactions, including hybrid capital issuances and convertible andexchangeable bonds.

Dirk EiselCounsel, Allen & Overy

Frankfurt, GermanyT: +49 69 2648 5522 E: [email protected] W: www.allenovery.com

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1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?The Central Bank of Ireland (CBI) is responsible for supervising andenforcing compliance with the CRD IV requirements in Ireland.


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?Yes. In addition to common shares, B ordinary shares (with limited dividendrights), deferred shares, certain preference shares, investment shares (formutuals) and promissory notes are eligible. Under Irish law, theseinstruments meet the CET1 definition under the CRR and were reportedto the EBA under article 26 of the CRR.

2.2 What instruments qualify as AT1 capital?In summary, any instrument approved by the CBI as such will qualify.Recital 75 of the CRR clarifies that competent authorities may also maintainpre-approval processes regarding contracts governing additional tier 1 andtier 2 capital instruments, with those capital instruments only recognisableby the institution as additional tier 1 capital (or tier 2) capital once theyhave successfully completed these approval processes.

The CBI requires all new capital instruments, including any associatedarrangements, to have received permission before they may be included inown funds. In cases other than the issuance of ordinary shares, includingamendment of the effective terms and conditions of own funds instruments,the CBI will require 30 days’ notice, starting from the point at which allnecessary information has been provided to the CBI. ‘Necessaryinformation’ will comprise a full description of the proposed issuance. Forproposed issuances of CET1, other than common shares, and AT1instruments, the necessary information must also be accompanied by a legalconfirmation addressed to the CBI from an external advisor of sufficientstanding and experience in the area of financial services law. Thatconfirmation must unequivocally state that the institution is entitled torecognise the proposed issue within the relevant tier of capital because itand its associated arrangements meet the applicable eligibility criteria underCRR. The legal confirmation must take relevant technical standards intoaccount and, in particular, should treat pertinent EBA outputs (for example,guidelines, recommendations and Q&As) as if they were binding.


3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation?The relevant legislation is the EU (Capital Requirements) Regulations 2014(S.I. 158/2014) (the CRD IV Regulations).

The member state discretion in article 160(6) of CRD IV which wouldfacilitate implementation of the capital conservation buffer (CCB) and/orcounter-cyclical capital buffer (CCyB) before 2016 has not been transposedin the CRD IV Regulations. Therefore, the standard transitional period forthe introduction of the mandatory CCB, as well as the CCyB, will apply,commencing January 1 2016, in accordance with regulation 119 of theCRD IV Regulations.

Once the capital buffers regime becomes applicable, institutions will besubject to a ‘combined buffer requirement‘, as defined in regulation 115(g)of the CRD IV regulations, which will constitute a combination of the CET1 capital required to meet the mandatory CCB and other specified bufferrequirements to which institutions may be subject.

3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?As per the answer to EBA Q&A 39, EU regulators cannot lay down rulescontaining requirements for own funds instruments supplementary to orstricter than those already laid down in the CRR. Institutions maythemselves choose to apply triggers higher than 5.125% CET1 in their draftAT1 instruments. It is not yet clear what capital triggers are expected.

3.3 How is the PONV defined in your jurisdiction?There is no definition, pending implementation of the BRRD.

3.4 What are the grandfathering provisions and how are theyimplemented?In relation to own funds, under article 465(1)(a) of the CRR, the CBI isentitled to determine the phase-in rate for common equity tier 1 (CET1)and tier 1 instruments. Since January 1 2014, institutions are required tohold a minimum level of CET1 of 4% and a minimum level of tier 1 of5.5%. By January 1 2015, all institutions must meet the full phase-inrequirement under the CRR of 4.5% CET1 and 6% tier 1. Ineligible non-state aid capital instruments and items will be grandfathered within CET1,AT1 and tier 2 on a sliding scale, with full de-recognition from January 12022.

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding?In the context of the CBI’s Financial Measures Programme, which formedpart of the obligations under the agreement between Ireland and theEuropean Commission, European Central Bank and IMF (the Troika), anumber of domestic Irish banks were subject to stress testing during theperiod 2011 to 2013 (the Troika stress tests).

A number of Irish banks were also subject to the ECB/CBI AQR and EBAcomprehensive assessment stress testing process (the EU stress tests), resultsof which were published in October 2014.

4.2 Which national body is conducting the tests?The CBI was the national body responsible for conducting the Troika stresstests and was also responsible, at a domestic level, for the EU stress tests.

Ireland

Robert Cain, Arthur Cox

www.arthurcox.com

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4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?The institutions subject to the Troika stress tests were AIB, Bank of Ireland,Irish Life & Permanent and EBS Building Society. They were chosen asbeing systemically important domestic credit institutions. Anglo Irish Bankand Irish Nationwide Building Society were also subject to more limitedstress testing within the same process.

AIB, Bank of Ireland, Permanent TSB, Ulster Bank Ireland Limited andMerrill Lynch International Bank were separately subject to the EU stresstests.

4.4 How does the AQR feed into your jurisdiction’s stress tests(where relevant?)The AQR is separate to the domestic stress tests, which were part of theCBI’s Financial Measures Programme agreed with the Troika.

4.5 Are any supplementary banks (where relevant) being selectedfor EBA testing too?No.

5. Bank Supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all? No changes, save where necessary in the context of the single supervisorymechanism from November 4 2014 onwards.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?The CBI has provided no information of its own on how the JST will workin practice.

5.3 How will they impact the implementation of revised capital plansfollowing stress tests?Unknown.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?Irish tax law does not provide a distinction for deductibility based on theregulatory capital status of an instrument that is issued. Instead, it looks tothe form of the instrument (either debt or equity) and whether couponspaid on a debt instrument are re-characterised as non-deductibledistributions, for example by being profit dependent. The Irish Revenuehas, however, in the past maintained and, we believe continues to maintain,that payments on any tier 1 capital instrument are inherently non-deductible. The purported technical basis for this is that the payments on atier 1 instrument are capital in nature and therefore cannot be deductibleagainst income. Whether this is the case, however, is a matter of lawdepending on the facts of each case. The Irish Revenue has taken a similarposition in relation to tier 2 instruments that are structured as debt, butusually grants a concessional tax deduction for payments on tier 2instruments. Accordingly, in practice, payments of coupon on tier 2 CoCosare generally regarded as tax deductible payments.

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?Coupon payments on an AT1 instrument that is a share would be subjectto Irish dividend withholding tax at the rate of 20%. A large number ofexemptions exist from dividend withholding tax, including for payments toresidents of Irish tax treaty countries or EU member states. Interest paid ondebt instruments, unless re-characterised as a distribution, will be subjectto interest withholding tax at the rate of 20%. There are a number ofexemptions from interest withholding tax which are typically replied on inthis case. First, the instrument may be listed on a recognised stock exchangeand so would qualify as a quoted eurobond, which eliminates withholding.

Secondly, the Irish Revenue has in the past accepted that payments on tier2 CoCos fall within the exemption from withholding tax for payments ofinterest by banks in the ordinary course of their business.

6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction? There is no need to enhance the tax efficiency of T2 securities. So far, therehas been little pressure to enhance the tax efficiency of AT1 instruments.The reason for this as far as the tax efficiency of AT1 instruments isconcerned is that, following the financial crisis, the Irish banks have incurredlosses which are available for carry-forward indefinitely in Ireland.Accordingly, generating additional tax deduction on AT1 instruments doesnot have any immediate benefit. This may change, however, as the changesin approach to AT1 instruments across Europe have been highlighted to theIrish policymakers and in the future the treatment of AT1 instrumentsmight be altered.

6.4 What is the tax treatment in terms of the capital gains on a writedown or conversion?In the case of a write-down or a conversion of an instrument following atrigger event, no gain should arise for the issuer. Holders will be taxed undertheir domestic law, as applicable.


7.1 What type of loss absorbency features are/ will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?Contractual loss absorbency features are only required for AT1 instrumentsunder the CRR. In the CBI’s view, both write-down and conversion areacceptable forms of loss absorption for AT1 instruments.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?Loss absorbency triggers are not part of the eligibility requirements for tier2 under the CRR. Institutions may, however, propose including suchcontractual provisions in their draft instruments for consideration by theCBI.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?Absent company law/insolvency law requirements, no. Issuers may chooseto propose tier 2 instruments with provisions restricting coupon paymentsin certain circumstances for pre-approval to the CBI; however, the CBI willnot mandate those provisions.

8.2 How are MDAs calculated, and what happens in case of abreach?The method of calculating MDAs and implications of breach are as perCRD IV.

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?No.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?The capital measure for the leverage ratio is not a competent authoritydiscretion. It is prescribed in article 429(3) CRR as follows ’the capitalmeasure shall be the tier 1 capital‘. As part of an EU Commission review ofthe impact and effectiveness of the leverage ratio, the EBA will consider

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whether using own funds or CET1 capital as the capital measure could bemore appropriate for tracking the risk of excessive leverage (article 511(3)(f )CRR). The CBI will participate in this work at EBA sub-group level.

10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements?There is no specific guidance for mutuals (there is only one licensed buildingsociety in Ireland).

10.2 Have additional rules and regulations been issued in relationto Sifis?No, save that the CRD IV regulations reflect CRD IV capital bufferrequirements in relation to G-SIIs and O-SIIs. To date, no Irish banks havebeen identified as Sifi, G-SII or O-SII.


11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?There has been state intervention in a number of Irish credit institutions inthe context of the financial crisis. For example, Anglo Irish Bank and IrishNationwide Building Society were both nationalised, restructured andultimately liquidated; there were large capital injections into AIB, Bank ofIreland and PTSB; and EBS Building Society was merged into AIB. Theinterventions described above were undertaken by the department of financeunder emergency powers available under the Credit Institutions(Stabilisation) Act 2010. The CBI now has a resolution toolkit available toit under the Central Bank and Credit Institutions (Resolution) Act 2011and has used these powers to resolve a number of credit unions recently,notably Newbridge Credit Union. The BRRD will be implemented in 2015.

12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?The CBI retains the ability to apply a wide range of pillar 2 requirements(including on a case-by-case basis).

12.2 What, when, and how are banks required to disclose buffer/trigger information and what are the consequences for couponpayments if they disclose a breach? There are no specific requirements on disclosure. Impact on couponpayments will depend on the terms of the notes.


13.1 Are there any local provisions that could trigger earlyredemption?Regulatory calls are possible under the CRR framework and as such banksmay choose to include them in their draft instruments. There are no specificIrish requirements in relation to regulatory calls.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?Credit default swaps and other tools can be used in accordance with theCRR credit risk mitigation requirements.


15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?No. We understand that the Department of Finance has commenced workon implementing the BRRD, but draft legislation has not yet been madeavailable and there has been no public consultation as yet.

In the absence of BRRD implementation, applicable powers are containedin the Central Bank and Credit Institutions (Resolution) Act 2011. Keypowers can be exercised when certain intervention conditions are met (forexample, if CBI is satisfied that there is a present or imminent serious threatto the financial stability of the authorised credit institution concerned orthe financial system in Ireland). Powers include: establishing a bridge bank,direct transfers of assets/liabilities and putting a bank into ’specialmanagement‘. The act will need to be amended/repealed when the BRRDis implemented

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?No.

16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?No.

About the authorRobert Cain is a partner in the financial regulation group of ArthurCox. He specialises in Irish and European financial services regulation.He advises domestic and international financial institutions, includingcredit institutions, investment firms, payment institutions andinsurance companies. He advises on Irish authorisation and perimeterissues, compliance with conduct of business and other requirements,regulatory capital, market abuse, prospectus and transparencyrequirements, payment services, corporate governance, regulatoryenforcement and litigation, AML and financial institution M&A(including the sale and acquisition of financial assets).

Robert CainPartner, Arthur Cox

Dublin, IrelandT: +353 1 618 1146E: [email protected] W: www.arthurcox.com


1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?Directive 2013/36/EU (the CRD) and regulation (EU) No 575/2013 (theCRR and, together with the CRD IV, the CRD IV Package) have beenimplemented in Italy by means of the Bank of Italy circular no. 285 ofDecember 17 2013 (Disposizioni di vigilanza per le banche the Bank of ItalyRegulations).

In the implementation process, to avoid any discrepancy with the CRD IVPackage, the Bank of Italy has prepared the Bank of Italy Regulations.Within those regulations, the Bank of Italy has specified, where necessary,the application of its discretionary power, which determines a partialdeparture from the CRD IV Package.

As regards the above, in the following answers, after a recap of the applicableCRD IV Package, relevance will be given to the specific points thatconstitute Italian exceptions to the common set of rules set forth by theCRD IV Package.

Article 4 of CRD IV requires member states to empower a supervisingauthority that is responsible for carrying out the functions and dutiesprovided for in the CRD IV Package and especially to supervise the activitiesof banks. In Italy, articles 53 and 67 of legislative decree no. 385 ofSeptember 1 1993 (the Consolidated Banking Act) empower the Bank ofItaly to enact the relevant dispositions on regulatory capital and, moregenerally, to implement all rules on banking supervision, including those ofthe CRD IV Package.


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?The CRR rules and, in particular, part 2, title I, chapter 2 of the CRR andthe European Commission Regulatory Technical Standards (the RTS) onthis point, give a detailed set of requirements that instruments have to abideby to qualify as CET1. The Bank of Italy Regulations deal with the topic ofeligible instruments for CET1 in part 2, chapter 1 (Fondi Propri), where nodiscretionary power is exercised by the Bank of Italy apart from that relatedto capital contribution payments (versamenti in conto capital) or non-repayable contribution payments (versamenti a fondo perduto). In this respectthe Bank of Italy, under part 2, chapter 1, section VI of the Bank of ItalyRegulations clarifies that the above-mentioned contributions may beincluded in CET1 only if they are compliant with the CRR and when theyprovide for a repayment only in the case of liquidation of the bank, and ina maximum amount equal to the residual surplus (if any) and pari passuwith the other CET1 instruments.

In addition to the above, and as clarified in the guideline issued by the EBAon May 28 2014 – which provided a list of CET1 capital instruments foreach member state – in Italy, the instruments that qualify as CET1-eligibleare the following: ordinary shares (azioni ordinarie), privileged shares (azioniprivilegiate), cooperative shares issued by credit cooperative banks (azionicooperative emesse da banche di credito cooperativo), and cooperative sharesissued by popular banks (azioni cooperative emesse da banche popolari).

Under article 36 of the CRR, the supervised banks will deduct deferred taxassets that rely on future profitability from CET1. In this respect, article 14of the Commission Delegated Regulation (EU) No. 241/2014 – that is, theregulatory technical standards concerning, among other things, theapplication of deductions – states that deferred tax assets that rely on futureprofitability do not count towards CET1 as long as they are offset withassociated deferred tax liability arising from intangible assets and fromdefined benefit pension fund assets. In this respect, the Bank of ItalyRegulations do not provide for any discrepancy with the relevant rules ofthe CRD IV Package. On the other hand, concerning the transitional ruleson this point, part II, chapter 14, section II of the Bank of Italy Regulationsstate that the rules provided for by the CRD IV Package and concerningthe deduction of deferred tax assets depending on future profitability willbe fully implemented by January 1 2018.

2.2 What instruments qualify as AT1 capital?The provisions in respect of the AT1 capital were implemented by chapter3, section 1 of the CRR with further specifications in chapter 3, section 1of the Commission Delegated Regulation (EU) No. 241/2014. In particular,these new provisions require instruments to be subordinated with fullydiscretionary, non-cumulative dividends or coupons, and with neither amaturity date nor an incentive to redeem.

The Bank of Italy Regulations are fully in line with these principles. Theymake direct reference to the CRR and no discretionary power has beenexercised on this point. Accordingly, there is no specific category ofinstruments that qualify as AT1 capital, but rather, an instrument’s eligibilityis judged on a case-by-case basis with reference to the the specific AT1features set forth under the CRR and the above-mentioned CommissionDelegated Regulation.


3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation? The new capital buffers are provided for under title VII, chapter 4 of theCRD, with the purpose of making banks more resilient to losses, marketcyclicality and systemic risk.

Italy has implemented the relevant rules in part 1, title II, chapter 1 of theBank of Italy Regulations. In particular, chapter 1, (a) section II regulatesthe capital conservation buffer, (b) section III makes reference to thecounter-cyclical capital buffer, and, (c) section IV covers the globalsystemically important institution buffer (the G-SII buffer) and the othersystemically important institution buffer (the O-SII buffer).

As regards the capital conservation buffer, beginning January 1 2014, banksare required to hold an additional amount of CET1 capital, equal to 2.5%of their total risk exposure amount.

With reference to the counter-cyclical capital buffer, part 1, title II, chapter1, section III of the Bank of Italy Regulations, in line with the CRD IVPackage, requires banks to hold up to 2.5% CET1 capital. To enable thecalculation of this buffer, on a quarterly basis, the Bank of Italy publishesthe internal counter-cyclical ratio, taking into account, (i) the nationaldevelopment credit ratio (and in particular a ratio which may detect the

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Italy

Enrico Giordano, Vincenzo Troiano and Gregorio Consoli, Chiomenti Studio Legale

www.chiomenti.net

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amount of credit granted on the gross domestic product), and, (ii) the ESRBposition under article 135 of the CRD. A gradual introduction of thecounter-cyclical capital buffer is to take place from January 1 2016. Inparticular, it will apply on a temporary basis in cases where the Bank of Italydeems the credit growth excessive.

As regards the G-SII buffer, under the CRD IV Package, any G-SII has tobe allocated in one of the five sub-categories, as defined by article 131(9) ofthe CRD and specified by an annually updated list of the Financial StabilityBoard (the FSB). In this respect, from 2016 onwards, the relevant banks arerequired to hold an amount of capital which ranges between 1.0% and3.5%, depending on their systemic relevance. As provided by article 131 ofthe CRD, the Bank of Italy, exercising its sound supervisory judgment may:(i) reallocate a G-SII from a lower sub-category to a higher sub-category,and, (ii) allocate an entity that has an overall score that is lower than thecut-off score of the lowest sub-category to that sub-category or to a highersub-category, thereby designating it as a G-SII. With reference to the O-SIIbuffer, the Bank of Italy is responsible for the classification of domesticallysystemic banks, based on their size, their relevance with respect to theEuropean and Italian economies, their cross-border activities, and theinterconnection of the banks with the financial system. Starting fromJanuary 1 2016, the Bank of Italy, must review annually the relevant list andmay require each O-SII to maintain an O-SII buffer of up to 2% of thetotal risk exposure amount.

3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?As already stated above, the topic of AT1 instruments is addressed by theBank of Italy Regulations in part 2, chapter 1. In particular, according tochapter 1, section I (fonti normative), the Bank of Italy does not exercise anydiscretion and directly refers to articles 52 and 54 of the CRR regardingAT1 instruments. In particular, article 54 of the CRR states that a triggerevent occurs when the CET1 ratio of the institution falls below 5.125% ora higher level determined by the issuer and specified in the legaldocumentation of the instrument. In this respect, reference is also made toCommission Delegated Regulation (EU) no. 241/2014, chapter III(Additional Tier 1 Capital) and, specifically, to article 22, which providesthe relevant procedures and timing to determine the occurrence of a triggerevent for the purposes of article 52(1)(n) of the CRR. With further referenceto disclosure requirements, article 437 of the CRR – as further specified byannex III of Delegated Regulation (EU) No 1423/2013 – requiressupervised institutions to disclose, among other things, in the templateprovided, information on additional tier 1 instruments and, specifically, adescription of their main features and their full terms and conditions. Part2, chapter 13, section I of the Bank of Italy Regulations makes directreference to the implementation rules without exercising any discretionarypower.

3.3 How is the PONV defined in your jurisdiction?The Banks Resolution and Recovery Directive (Directive 2014/59/EU) (theBRRD), under which the provision concerning the point of non-viabilityis provided for, has not yet been implemented in Italy.

Under the BRRD the PONV should be the point at which the Bank ofItaly, in its role of competent authority, determines that an institution meetsthe conditions for resolution; or, at which the Bank of Italy decides that theinstitution would cease to be viable if AT1 and tier 2 instruments were notwritten-down or converted. In particular, the legal documentation of therelevant instruments, and any prospectus or offering documents publishedor provided in connection with the instruments, must specify that theinstruments are to be written-down or converted by the authorities in thecircumstances set out by the BRRD.

3.4 What are the grandfathering provisions and how are theyimplemented?The CRR sets forth the rules on grandfathering of capital instruments inpart 10, title I, chapter 2. The CRR leaves a certain degree of flexibility tomember states in the implementation of the rules on this subject. Inparticular, it empowers competent authorities to specify the transitional rulesset at EU level, with specific reference to the percentage range that thedifferent classes of capital have to meet. The Bank of Italy Regulationsexercise this right and provide for grandfathering provisions on own fundsin part 2, chapter 14, section II, paragraph 10. In particular, the Bank ofItaly has maintained a favourable position for banks, provided that theyhave set the amount of CET1 and AT1 items at the maximum point of therange as provided by the CRR for each stage, until December 31 2021.

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding?To facilitate the review and evaluation process of banks, article 100 of theCRD IV requires competent authorities to carry out, on at least an annualbasis, supervisory stress tests on institutions they supervise. The Bank ofItaly has implemented rules on stress testing in sections II and III of part 1,title III, chapter 1 of the Bank of Italy Regulations. In particular, underarticle 23 of regulation (EU) No. 1093/2010, the Bank of Italy schedulesannual stress tests in the context of the supervisory review and evaluationprocess (SREP).

The ECB carried out a comprehensive assessment, which included a stresstest in close cooperation with EBA and the competent authorities. For thispurpose, with the objective of ensuring that common methodologies areused by all member states, the ECB issued a comprehensive assessment stresstest manual. Results of the EU-wide stress tests were published in lateOctober 2014.

With reference to national stress tests, part one, title III, chapter I, sectionII of the Bank of Italy Regulations requires supervised institutions to reportto the Bank of Italy, on an annual basis, (i) information on internal andtotal capital taken from the financial statements for the last fiscal year, and,(ii) information on prospective internal and total capital for the fiscal year,taking into consideration any mutation in the capital structure (for example,capital increases) as set out in the bank’s strategic plan. Specifically, banksmust submit by April 30 of each year their financial data as at December31 of the previous year. The results of domestic stress tests from previousyears are published on the Bank of Italy website:https://www.bancaditalia.it/vigilanza/analisi-sistema/stress_test.

4.2 Which national body is conducting the tests?Together with the European Central Bank, which works in cooperation withthe EBA and the European Systemic Risk Board (ESRB), the stress testswere carried out by the national supervisory authorities in EU memberstates. In Italy, the competent authority is the Bank of Italy, which publishesthe responses to the stress tests of the main Italian banking groups performedat European level.

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?The final list of credit institutions that will be subject to SSM and futurestress tests was published by the ECB on September 4 2014 and is availableon the ECB website. The criteria adopted for the selection of the creditinstitutions subject to stress tests were the institution’s size, importance forthe economy of the union or any participating member state, andsignificance of cross-border activities.

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The Italian credit institutions that will be subject to stress tests starting from2015 are: Banca Carige, Monte de Paschi di Siena, Unicredit, Intesa SanPaolo, Banco Popolare, Banco Popolare dell’Emilia Romagna, BancaPopolare di Milano, Banca Popolare di Sondrio, Banca Popolare di Vicenza,Barclays Italy, ICCREA Holding, Mediobanca, Unione di Banche Italianeand Veneto Banca.

With reference to the 2014 EU-wide stress tests, (with the changes to beapplied starting from 2015), Credito Emiliano and Credito Valtellinese havebeen added to the above-mentioned list, and, Barclays Italy has beenremoved.

4.4 How does the AQR feed into your jurisdiction’s stress tests(where relevant?)The ECB’s AQR played a key role in the context of the comprehensiveassessment carried out by the ECB. In particular, while banks were asked toprovide data on selected portfolios in line with the Asset Quality ReviewManual, the Bank of Italy assigned individual teams to conduct the AQRfor each bank, with the objective of providing for timely responses andensuring the independence of the review.

In addition, as regards the AQR process in the context of the CRD, theSupervisory Review and Evaluation Process has been implemented in Italyunder the Bank of Italy Regulations, which provides for the specificprovisions concerning asset quality reviews. The AQRs in the context of theCRD have the scope of assessing the present and prospective level of creditrisk exposure for supervised financial intermediaries. With the support of asystem of business analysis (sistema di analisi aziendale), the Bank of Italysupervision takes the form of both on-site and remote inspections. Theremote inspections are based on a wide series of data which are providedthrough the supervisory reports and from the central credit register (centraledei rischi), which plays a central role in transmitting data on singlecounterparties to the Bank of Italy with high frequency. It is planned thatthe on-site inspections will be carried out on an annual basis, except in thecase of bank groups with specific relevance, which are subject to continuousmonitoring through a series of targeted inspections.

4.5 Are any supplementary banks (where relevant) being selectedfor EBA testing too?Apart from the banks listed in decision ECB/2014/3 of February 4 2014,which identified the credit institutions that are subject to the comprehensiveassessment and the final list of credit institutions published by the ECB onSeptember 4 2014, the ECB has stated that it is important to include alsoall entities that are members of the groups of supervised entities that aresubject to prudential supervision on a consolidated basis (group entities).Those group entities are also included in the list.

5. Bank Supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all? As the first element in the Banking Union, the Single SupervisoryMechanism (SSM) became operative in November 2014.

The introduction of the SSM has led to a deep reform in the organisationof the Bank of Italy. In particular, the supervisory department structure hasbeen completely reconfigured to meet the requirements of a deepersupervision on financial intermediaries, as required by the SSM. Theintroduction of the SSM also led to the modification of the denominationof some departments in the Bank of Italy, witnessing the shift of certainpowers from one department to another. Under the SSM the EuropeanCentral Bank (ECB) is competent to exercise prudential supervision on themost important banks (or groups) located in the eurozone, whether directlyby the bank’s own services, or indirectly by the national prudentialsupervisors but under the general guidance of the ECB. From a general pointof view, while for the smaller financial institutes (that is, banks or groups)the Bank of Italy retains supervisory power, the ECB is in charge of direct

supervision over the most important Italian banks. Notwithstanding theabove, the ECB may decide to exercise the facility to advocate thesupervision of banks and/or groups that do not qualify as important.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?As set forth under regulation ECB/2014/17, the Joint Supervisory Teams(the JSTs) are structured in a way that permits the Bank of Italy to continueplaying a central role in the supervision of the banks.

In fact, under the JSTs, each team is supervised by an ECB coordinator, butone or more members of the national competent authorities are appointedto supervise the relevant intermediaries. The newly-appointed JSTs arestructured in a manner that will help avoid regulatory capture risks, throughthe turnover of staff. Under the SSM, the JSTs have direct supervision ofapproximately 130 banks that are considered important.

Each JST is in charge of planning and executing the annual supervisoryprogramme for its assigned institution and it also enacts and follows theimplementation monitoring of decisions made by the supervisory board andthe governing council. JSTs can also propose topics for on-site examinationsand follow up on their findings.

The distinct structuring of the JST, carried out by the coordinator, providesthe ability to focus on single supervised entities and to react to specific eventsthat may affect particular players in the market.

5.3 How will they impact the implementation of revised capital plansfollowing stress tests?As stated above, the JSTs provide for close supervision of individualimportant institutions. Their wide powers, which comprise inspections ofthe relevant banks, day-to-day supervision, and supervisory examinations,provides the possibility to closely monitor institutions that have notresponded successfully to the stress tests. For this reason, the introductionof JSTs will lead to more efficient stress testing, which subsequently can befollowed up on directly by the supervisors.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?Under article 2, paragraph 22, of decree no. 138 dated August 13 2011(Decree 138/2011), the remuneration of financial instruments, other thanshares and equity-like instruments, falling within the scope of capitaladequacy EU directives and national prudential regulations that are issuedby banking and insurance intermediaries, is deductible in the hands of theissuer and is subject to the tax rules provided for interest as set forth byarticle 96 of the Italian tax code. Specifically, banks, financial institutions,insurance companies and holding companies (other than those which holda participating interest in industrial and commercial companies) are allowedto deduct for fiscal purposes 96% of their interest costs.

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?The financial instruments falling within the scope of the above-mentionedDecree 138/2011 are subject to the provisions set forth by legislative decreeno. 239 of April 1 1996 (Decree 239/1996). Under Decree 239/1996,coupon payments are subject to a final substitute tax (imposta sostitutiva) atthe rate of 26%. However, this imposta sostitutiva does not apply in the caseof payments in favour of Italian companies. It also does not apply if, amongother things, the payment is made to beneficial owners who are non-Italianresidents with no permanent establishment in the republic of Italy throughwhich the financial instruments have been purchased or held, provided thatthe entity or individual is a resident, for tax purposes, in a country thatrecognises the Italian tax authorities’ right to an adequate exchange ofinformation, and that certain requirements and procedures set forth inDecree 239/1996 are met.

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6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction? The above-mentioned tax treatment, set forth by Decree 239/1996 andapplicable to the AT1 and T2 securities under Decree 138/2011 is morefavourable and efficient in respect of the ordinary treatment applicable tosecurities not eligible for this regime.


7.1 What type of loss absorbency features are/ will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?As already stated above, the Bank of Italy Regulations make direct referenceto the CRD IV Package and to the relevant RTS to regulate AT1 and tier 2instruments. In particular, with reference to AT1 securities, part 2, chapter1, section I (fonti normative) of Bank of Italy Regulations directly refers toarticle 52 of the CRR and to chapter III (Additional Tier 1 Capital), article20 and 21 of the Commission Delegated Regulation (EU) No. 241/2014,to define the specific features required for AT1 and tier 2 securities. On theother hand, features of tier 2 instruments are directly regulated by article63 of the CRR.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?As clarified above, in ruling the features of the AT1 and tier 2 instruments,the Bank of Italy Regulations make direct reference to the CRR and to therelevant RTS. In this respect, while the AT1 instruments, under article 54of the CRR (as implemented by the relevant RTS) must be loss absorbing,no such specific provision is applied to the tier 2 Instruments.Notwithstanding the above, tier 2 instruments may provide for specific lossabsorption features in accordance with the relevant terms and conditions.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?As specified in the previous answers, the Bank of Italy Regulations fullyimplement the CRR provisions in respect of the AT1 and tier 2 instruments.Accordingly, apart from the general rules applicable in accordance with theCRR and the applicable RTS, no specific local rules have been implementedthat would affect the issuer’s ability to pay a coupon.

8.2 How are MDAs calculated, and what happens in case of abreach?Article 141 of the CRD, in connection with combined buffer requirements,requires member states to prohibit any institution from distributing CET1capital to the extent that it would decrease its capital to a level where thecombined buffer requirement was no longer met. On the other hand, incases where member state institutions are already failing to meet thecombined buffer requirement, those institutions will be required to calculatea maximum distributable amount (the MDA) in accordance with paragraph4 of the same article 141 of the CRD and to notify the competent authorityof that MDA.

The Bank of Italy Regulations, under part 1, title II, chapter 1, section V(Misure di Conservazione del Capitale) provide for specific rules on the MDA,which are in line with the provisions set forth under article 141 of the CRD,and impose restrictions on payments and distributions in connection withcommon equity, AT1 instruments and instruments with discretionarycoupon payments.

In addition to the above, the Bank of Italy Regulations do not provide forspecific rules concerning the breach of the MDA, but – as per article 142 ofthe CRD – they specify that, upon failure to meet the combined bufferrequirement, the bank will be required to prepare and submit to the Bankof Italy a capital conservation plan. Should the authority find this plan tobe unsatisfactory, it can require the bank to strengthen its regulatory capitalor impose more severe rules on distribution of capital.

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?The CRR requires banks to calculate a leverage ratio, a new regulatory toolthat will help the supervisory authorities to make banks more resilient torisks that, as well as capital shortfalls, can also be caused by liquidity crises.For this purpose, article 429 of the CRR defines the methodology for thecalculation of the leverage ratio. In Italy, the Bank of Italy Regulations, underpart 2, chapter 12, make direct reference to the relevant CRR rules.Moreover, in the implementation of these rules, article 499(3) of the CRRprovides some flexibility to the member state supervisory authorities. In thiscase, the Bank of Italy has exercised its discretionary power by providing thepossibility to Italian banks to calculate their leverage ratio on a quarterlybasis from January 1 2014 until December 31 2017, instead of using thearithmetic mean of the monthly leverage ratios over a quarter.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?The Bank of Italy Regulations do not provide for any alternative to the CRRrules on the calculation of the leverage ratio. Therefore, reference will bemade directly to article 429 of the CRR for clarification on whichinstruments can be considered for the calculation of the leverage ratio.

10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements?The Bank of Italy Regulations provide specific rules for mutuals. Inparticular, the criteria under which banks can be considered mutuals are setout in part 2, chapter 1, section IV, (2) of the Bank of Italy Regulations(that is, banche popolari, banche di credito cooperative, banche di garanziacollettiva dei fidi). The rules on participation that can be held in mutualsare set forth under part 3, chapter 1, section VIII.

Rules aimed at ensuring the compliance of mutuals with regulatoryrequirements are set out in part 1, title 1, chapters 1 and 2 of the Bank ofItaly Regulations, and these should be applied together with the rules forordinary banks. In this respect, rules on minimum initial share capital areset out in section II of chapter 1, and rules for the granting of authorisationfor banking activities appear in section V of chapter 1. Chapter 2 providesthe relevant rules in relation to banking groups.

10.2 Have additional rules and regulations been issued in relationto Sifis?Rules relating to Sifis appear in part 1, title II, chapter, 1, sections 1 and 4of the Bank of Italy Regulations. No additional provisions are applied underthe Italian framework, but direct reference is made to article 131 of theCRD and to the relevant RTS that regulate the identification of Sifis. Inthis respect, the final draft of the technical standards and guidelines for theidentification of global systemically important institutions (G-SIIs) has beenadopted by the EBA and submitted to the European Commission. Aspreviously mentioned, the 2013 update on the group of global systemicallyimportant banks was published by the Financial Stability Board onNovember 11 2013 and named UniCredit Bank as the only Italian bankamong those identified of global systemic relevance. The Bank of Italy hasnot yet identified the financial institution that will be included in the O-SII list.

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11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?There have been no examples of nationalisation or restructuring of Italianbanks in recent years. However, in the aftermath of the 2007 financial crisis,two sets of rules were implemented to provide urgent measures for banksthat were in need of liquidity and capital. These were decree no. 155 ofOctober 9 2008 (introducing the so-called ’Tremonti bonds‘), law no. 135of August 7 2012, and law no. 228 of December 24 2012 (introducing theso-called ’Monti bonds‘). These financial instruments, underwritten by thetreasury, provided for specific characteristics aimed at ensuring that certainbanks were able to meet regulatory requirements in favourable conditions.All banks have been able to repay these instruments, avoiding partial or totalnationalisation.

12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?The provisions on pillar 2 are specified in part 1, titles III and IV of theBank of Italy Regulations. These rules cover the topics of bank governance,internal audit and information duties. In this respect, article 106 of theCRD states that competent authorities will require institutions to publishthe information referred to in part 8 of the CRR more than once per year.As specified in article 437 of the CRR – and further specified in annex IIIof delegated regulation (EU) no 1423/2013 – supervised institutions willdisclose information regarding their own funds and, in particular, (i) a fullreconciliation of CET1, AT1 and tier 2 items as well as filters anddeductions that have been applied under the relevant regulation, (ii) thebalance sheet in the audited financial statements of the institutions, (ii) adescription of the main features of the CET1, AT1 and tier 2 instrumentsthat have been issued by the individual bank, and, (iv) the full terms andconditions of the CET1, AT1 and tier 2 instruments. The Bank of Italy alsodetermines the means by which supervised institutions will publish therelevant information. Finally, within banking groups, the parent bank canbe asked by the Bank of Italy to publish on an annual basis a briefdescription of (i) the juridical structure of the institution, and, (ii) thegroup’s corporate governance.

As stipulated in part I, title III, chapter I, section II of the Bank of ItalyRegulations, banks will submit annually to the Bank of Italy informationconcerning their Internal Capital Adequacy Assessment Process (ICAAP),which will identify, among other things, the components of the banks’internal total capital and regulatory requirements. Banks will submit thisinformation by April 30 of each year, making reference to data as atDecember 31 of the previous year. With specific reference to bufferinformation, in cases where the relevant requirements are not met, banksare subject to limits, among other things, to distributions on CET1 andAT1 instruments. In particular, banks that do not meet the relevantrequirements will notify the Bank of Italy of the breach and will providewithin a particular timeframe certain specific information in respect of thecapital conservation plan.

12.2 If so, what are the disclosure requirements around pillar 2, ifany? Pillar 2 can be divided into two phases, ICAAP and SREP. The formerimposes on the bank an autonomous analysis of its existing and prospectivecapital structure. The latter, consists of the supervisory review process andprudential evaluation of the bank, and it is carried out by the competentsupervisory authorities. The disclosure requirements relate only to theICAAP. Corporate bodies are responsible for defining appropriate corporatesystems for risk management. Individual banks have to communicate on anannual basis the main characteristics of this process, disclosing the risks andthe determination of the capital they consider adequate for the bank. Theydo this through a structured report that is submitted to the Bank of Italy.The report also contains a self-evaluation, which provides for the disclosure

of the corrective actions that the bank intends to put in place with respectto the weaknesses identified.


13.1 Are there any local provisions that could trigger earlyredemption?The CRR provides rules on early redemption caused by an issuer’s call inarticle 52(1)(i). The rules require that the conditions set forth under articles77 and 78(4) of the CRR are met. In particular, even if permission fromcompetent authorities is required for early redemption of own funds, underthe Italian regulatory framework, there are no local rules or specificprovisions that can be applied in this respect.

Indeed, the Bank of Italy Regulations refer directly to the CRR and,specifically, to the conditions set forth under article 78(4) of the CRR, wherereference is made to the regulatory and tax calls.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?The provisions on instruments for credit risk mitigation are set forth underpart 3, title II, chapter 4 of the CRR and, with reference to derivatives,under articles 204 and 213 of the CRR. The Bank of Italy Regulations, inthe implementation of these rules, refers directly to the CRR rules and doesnot exercise any discretionary power on this point.


15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?No bail-in regulation is provided under Italian law. The BRRD, whichprovides for the introduction of the bail-in system, has not yet beenimplemented in Italy. The BRRD will be implemented and will enter intoforce before December 31 2014, except for the instrument of bail-in. Themember states have been granted one more year by the EU commission forthe implementation of the bail-in instrument, and the deadline is set forthe end of 2015. In this respect, it is common practice that, on an annualbasis, the Italian parliament delegates to the Italian government theimplementation of the European directives that have entered into force atEU level and have not yet been implemented under Italian law (the Law onEuropean Delegation). The BRRD was not included among the directivesto be implemented by means of the Law on European Delegation to beapproved during the second semester of 2013 With reference to the Law onEuropean Delegation for 2014 (to be approved in 2015), a first draft hasbeen prepared but has not yet been submitted to parliament. Accordingly,it seems unlikely that the BRRD will be implemented by the Italianparliament before December 31 2014 and, most likely, it will beimplemented during 2015.

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?Considering that the PONV is defined in a BRRD directive and the BRRDhas not yet been implemented in Italy, there has not yet been anyspecification by the authorities on how banks and their assets will be valuedat the PONV.

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16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?With reference to transitional provisions on own funds, the CRR grants acertain degree of discretion in the implementation of the rules, by requiringmember states to provide for the standards of application of individual rulesbetween January 1 2014 and a future date that varies depending on the item.Among them, the Bank of Italy Regulations have provided for stricter ruleswithin the percentage range set forth by the CRR in many cases and inparticular with reference to the CET1. In this respect, the Bank of ItalyRegulations require banks to hold 4.5% of CET 1 starting from January 12014, while the CRR required only 4%. The same applies to rules on thepercentage of unrealised gains that are removed from CET 1, where theBank of Italy Regulations have imposed stricter requirements for banks thanthose imposed by the CRR. The same can be said as regards deductionsfrom CET1, where the Bank of Italy Regulations, in many cases, haveprovided for stricter rules, that require banks to hold more common equityso as to meet the provisions on regulatory capital.

About the authorEnrico Giordano joined Chiomenti in 1992 and became a partner in2003. He heads the capital markets department and advises Italian andforeign clients in IPOs, corporate finance matters, privatisations,mergers and acquisitions of public companies, offerings of equity, debtand hybrid financial instruments listed on Italian and foreign markets.

He assisted the issuers or the book-runners in the recentrecapitalisations of numerous major Italian banks through rightsofferings, private placements or issues of convertible bonds.

Graduated in law, University of Rome, 1989; Ph.D, private comparativelaw, University of Macerata, 1991; professor of securities law, Universityof Modena, Faculty of Economics Marco Biagi, since 2005; admitted tothe Bar, Italy, 1992.

Enrico GiordanoPartner, Chiomenti Studio Legale

Rome, ItalyT: +39 06 4662 2326 E: [email protected] W: www.chiomenti.net

About the authorGregorio Consoli joined the firm in 2002 and became a partner in2013. He advises Italian and foreign clients on the structuring anddocumentation of debt transaction with a focus on bond issuances,structured finance transactions, securitisation of receivables, assetacquisition finance and secured lending transactions, project financeand real estate financing.

Graduated in law, L.U.I.S.S. Guido Carli University, Rome, 2001;admitted to the Bar, Italy, 2004; Ph.D, business law, L.U.I.S.S. GuidoCarli University, Rome, 2008.

Gregorio ConsoliPartner, Chiomenti Studio Legale

Rome, ItalyT: +39 06 4662 2241E: [email protected]: www.chiomenti.net

About the author

Vincenzo Troiano became a partner of the firm in 2006, having workedfor Banca d’Italia until 2000. He is head of the banks, insurance andother regulated entities department.

Vincenzo Troiano advises Italian and foreign clients in banks, insuranceand other regulated entities. He specialises in regulatory structure –compliance and internal control, prudential regulation, codes ofconduct, investment services, commercial contracts of regulated entities,real estate asset management, real estate funds, real estate securitisations,and corporate/M&A.

Graduated in law, University of Bari, 1987; Ph.D, bank legislation,University of Siena, 1992; admitted to the Bar, Italy, 1996; admitted topractice before the supreme court, Italy, 2006.

He has been an associate professor of economy law at the University ofPerugia, since 2004.

Vincenzo TroianoPartner, Chiomenti Studio Legale

Rome, ItalyT: +39 06 4662 2268E: [email protected]: www.chiomenti.net


1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III / CRD IVimplementation and what is their remit?The competent authority in Luxembourg responsible for supervisingfinancial institutions is the Commission de Surveillance du Secteur Financier(the CSSF). In addition to supervising financial institutions, the CSSF isthe competent authority for the instruction of licence application files.Licences of financial institutions are granted by the minister in charge ofthe CSSF.

However, as of November 4 2014 the European Central Bank (the ECB)has been granted certain supervisory powers over credit institutionsincorporated in Luxembourg in the context of the SSM Regulation (CouncilRegulation (EU) no. 1024/2013 of October 15 2013 conferring specifictasks on the European Central Bank concerning policies relating to theprudential supervision of credit institutions) and the so-called bankingunion.

This resulted in a shift of responsibility from the CSSF to the ECB, inparticular in relation to ’significant supervised entities‘ (as defined in article39 of the SSM Framework Regulation – ECB regulation of April 16 2014establishing the framework for cooperation within the Single SupervisoryMechanism [SSM] between the ECB and national competent authoritiesand with national designated authorities – adopted by the ECB inaccordance with the SSM Regulation).

In addition, both the SSM Regulation and the SSM Framework Regulationmake available certain macroprudential tools to the ECB relating to capitalrequirements. On September 4 2014, the ECB published the final list of’significant supervised entities‘ subject to its direct oversight as fromNovember 4 2014. The list published by the ECB also includes the ‘lesssignificant’ institutions and indicates the national competent authority incharge of their supervision.

Despite this recent change, the CSSF still plays an important role in termsof supervision of financial institutions as it remains responsible for lesssignificant entities as well as branches of financial institutions of non-EEAcountries. The CSSF will also have an important role to play in theframework of the SSM, which is a collective mechanism comprising theECB and national competent authorities under the ultimate responsibilityof the ECB.

Under the Capital Requirements Directive (directive (EU) 2013/36 of theEuropean Parliament and of the Council of June 26 2013 on access to theactivity of credit institutions and the prudential supervision of creditinstitutions and investment firms, amending directive 2002/87/EC andrepealing directives 2006/48/EC and 2006/49/EC [the CRD]), EU memberstates are required to designate the authority in charge of identifying, on aconsolidated basis, global systemically important institutions (G-SIIs), and,on an individual, sub-consolidated or consolidated basis, as applicable, othersystemically important institutions (O-SIIs), which have been authorisedwithin their jurisdiction and setting the systemic risk buffer and ofidentifying the sets of institutions to which it applies. The designatedauthority in Luxembourg for this purpose is expected to be the CSSF.

The Luxembourg central bank is responsible for the general oversight ofliquidity of financial institutions in Luxembourg, in particular as regardsbanks having access to monetary policy operations, without prejudice to theCSSF’s micro-prudential powers in this domain.

Luxembourg, as part of the eurozone, will follow what is being implementedon a European level with respect to the banking union, the set up of theSingle Resolution Mechanism (regulation (EU) no. 806/2014 of theEuropean Parliament and of the Council of July 15 2014 establishinguniform rules and a uniform procedure for the resolution of creditinstitutions and certain investment firms in the framework of a SingleResolution Mechanism and a Single Resolution Fund and amendingregulation (EU) no. 1093/2010) and the SSM. In addition, going beyondthe borders of the eurozone, is the Single Rulebook, which includes theCapital Requirements Regulation (CRR) and the regulatory technicalstandards prepared by the European Banking Authority (the EBA). Thoseinstruments are directly applicable across the EU and provide a single set ofuniform prudential rules in all EU member states.


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?Provisions relating to CET1 instruments are set out in the CRR (regulation(EU) No 575/2013 of the European Parliament and of the Council of June26 2013 on prudential requirements for credit institutions and investmentfirms and amending regulation (EU) no. 648/2012). In addition, the CSSFhas adopted a regulation (CSSF Regulation no. 14-01 on theimplementation of certain discretions of regulation (EU) no. 575/2013)providing for certain national discretions available to EU member statesunder the CRR. The CSSF Regulation refers to the CRR as far as thedefinition of CET1 instruments is concerned.

The CRR provides conditions in terms of common equity and applies tocredit institutions and to certain investment firms. The CRR, in additionto setting out the characteristics and conditions for CET1 eligibility, alsospecifies a series of mandates for the EBA. These include the developmentof regulatory technical standards to further specify the quality criteriaapplying to institutions’ regulatory own funds, as well the deductions thatshould be applied to own funds elements and the harmonising disclosures.In addition, the EBA is in charge of monitoring the quality of own fundsand may provide advice and opinions.

The CRR further provides that the EBA, on the basis of informationcommunicated to it by each competent authority, will establish, maintainand publish a list of all the forms of capital instruments in each memberstate that qualify as CET1 instruments. In the list the EBA published onMay 28 2014, there are types of instruments other than common shareswhich qualify as CET1 under Luxembourg law. These are: allocated capitalof a public establishment, notably the Banque et Caisse d’Epargne de l’Étatand the Société Nationale de Crédit et d’Investissement, and also share unitsin cooperative companies (for mutuals).

The CRR allows for institutions not to deduct deferred tax assets (DTAs)from CET1 items subject to the items’ conditions. However, the CRRprovides that this is only a possibility until December 31 2017. The CRRprovides that member states may determine the applicable percentage fordeduction within a certain range.

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Luxembourg

Patrick Geortay and Cathrine Foldberg Møller, Linklaters

www.linklaters.com

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The CSSF Regulation makes a distinction between DTAs relying on futureprofitability in existence before January 1 2014 and those relying on futureprofitability generated after January 1 2014.

The percentages applicable to deferred tax assets relying on futureprofitability in existence before January 1 2014 are: 20% in 2014, 40% in2015, 60% in 2016 and 80% in 2017. For deferred tax assets relying onfuture profitability generated after January 1 2014 the applicable percentageis 100% as of January 1 2014.

2.2 What instruments qualify as AT1 capital?This is set out in the CRR, which provides the requirements for capitalinstruments to qualify as AT1 instruments. The CSSF has, in the CSSFRegulation, specified that institutions that wish to include AT1 instrumentsin their capital need the CSSF’s advance approval. The CSSF will apply therequirements set out in the CRR when reviewing the instruments and theirAT1 eligibility.


3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevantlegislation/regulation?Combined buffer requirements are set out in the CRR, which has beendirectly applicable in Luxembourg since January 1 2014 (subject to certainexceptions which will come into force in 2015 and 2016), the CSSFRegulation and the national implementing statutes for the CRD.

The CSSF Regulation provides for a capital conservation buffer of CET1instruments of 2.5% of the total risk exposure amount calculated inaccordance with the CRR. This capital conservation buffer, whichanticipates the implementation of the CRD into domestic law, is applicableto institutions in Luxembourg as of January 1 2014.

The CRD also provides for requirements in relation to the institution-specific counter-cyclical capital buffer, systemic risk buffer, G-SII buffer,O-SII buffer as well as the combined buffer. The CRD provides that theseprovisions will apply from January 1 2016.

The Luxembourg parliament is working on a draft law for theimplementation of the CRD into Luxembourg law (Projet de loi no. 6660).The draft law was introduced to the Luxembourg parliament on February28 2014. By implementing the CRD into Luxembourg law, the intentionis to put in place all available implementing tools to ensure a robustcapitalisation level of Luxembourg banks. Accordingly, it is expected thatother buffers, including the counter-cyclical buffer, will be required as amatter of Luxembourg law.

In addition, the Luxembourg parliament is also working on a draft law(Projet de loi no. 6653) for the purpose of setting up a systemic riskcommittee. This draft law was also introduced to the Luxembourgparliament on February 28 2014. According to the draft law, thecommittee’s task is to coordinate the implementation of macro-prudentialpolicy with a view to safeguarding the stability of Luxembourg’s financialsystem.

On June 26 2014 the ECB published its positive opinion on the draft lawsand has expressed that it favours adopting these laws, establishing thecommittee and implementing the CRD into Luxembourg law.

Even though the timetable for adopting the above draft laws is not entirelyclear, the political intention is to close that process in the coming months.

The draft law for the implementation of the CRD provides details as tophase-in and the size of buffer requirements. These are as follows: (i) capitalconservation buffer of 2.5% applicable as of January 1 2014 (mandatory),

(ii) counter-cyclical capital buffer of 0% to 2.5% applicable as of January 12016 (mandatory), (iii) buffer for global systemically important institutionsof 1% to 3.5% applicable as of January 1 2016 with a gradual phase-in until2019 (mandatory), (iv) buffer for other systemically important institutionsof 0% to 2% applicable as of January 1 2016 (optional), and, (v) the systemrisk buffer, which has no limit applicable as of January 1 2014 (optional).Given that the draft law is yet to be approved by the Luxembourgparliament, these buffers may change.

3.2 What capital triggers are expected/are in place for AT1securities in your jurisdiction and what is the relevantlegislation/regulation?The capital triggers in place for AT1 securities in Luxembourg are those setout in the CRR. The trigger events provided for in the CRR for the write-down or conversion of AT1 instruments consists of the CET1 capital ratiofalling below certain thresholds.

3.3 How is the PONV defined in your jurisdiction?It is not defined in any Luxembourg regulation or law for the time being.This is expected to be implemented into Luxembourg law in the frameworkof the BRRD (directive (EU) 2014/59 of the European Parliament and ofthe Council of May 15 2014 establishing a framework for the recovery andresolution of credit institutions and investment firms and amending councildirective 82/891/EEC, and directives 2001/24/EC, 2002/47/EC,2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and2013/36/EU, and regulations (EU) no. 1093/2010 and (EU) no. 648/2012,of the European Parliament and of the Council [the BRRD]).

3.4 What are the grandfathering provisions and how are theyimplemented?The grandfathering provisions are those set out in the CRR. The requirementsin terms of own funds are provided in the CRR: (a) a CET1 capital ratio of4.5%; (b) a tier 1 capital ratio of 6%; and, (c) a total capital ratio of 8%.However, the regulation provides that for the period from January 1 2014 toDecember 31 2014 a derogation is available to national competent authoritiesand they may apply a CET1 capital ratio of a level that falls within a range of4% to 4.5% and a tier 1 capital ratio of a level that falls within a range of5.5% to 6%. The CSSF has clarified in the CSSF Regulation that the CET1capital ratio is of 4.5% and the tier 1 capital ratio is of 6%.

In addition, the CRR provides for certain phase-in arrangements in relationto items deductible from CET1, AT1 and tier 2 instruments whereby thecompetent authorities will determine and publish an applicable percentagewithin a certain range. The CSSF Regulation provides for the relevantpercentages in relation to these deductions which are applicable inLuxembourg.

The applicable rate for grandfathering items eligible into own funds for2014 is 80% and then decreases by 10% each year until 2022.

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/or areresults of previous stress tests outstanding?The CSSF has clarified the requirements of stress tests in circular 11/506.This circular applies to all credit institutions and investment firmsincorporated under Luxembourg law and all branches of non-EU creditinstitutions and investment firms. According to this circular all suchinstitutions implement a qualitative stress testing programme which willallow them to assess how the business model, risk profile (defined for all therisks inherent to their activities and organisation) and their existing capacityto manage and bear risks (capital, liquidity buffers and tools for riskmanagement and control) represent a coherent and robust system whenconfronted with adverse internal and external developments. The stress testswill be performed regularly, at least once a year, and their frequency will beadapted to the institution’s activities and to the nature of the incurred risks.

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No announcements have been made in relation to any upcoming tests inLuxembourg.

Alongside the Luxembourg requirements, and further to the adoption ofthe SSM, the ECB and the EBA recently finalised initiatives that will bedetailed in section 4.2 below.

4.2 Which national body is conducting the tests?The ECB performed a comprehensive assessment before assuming fullresponsibility for supervision under the SSM on November 4 2014. Theassessment started in November 2013 and ended in October 2014. Thisassessment included a review of the assets of banks and also stress testing onthe liabilities side of the banks’ balance sheet.

The ECB’s asset quality review (AQR) examined the asset side of bankbalance sheets as at December 31 2013.

The ECB’s stress test built on and complemented the AQR by testing aforward-looking view of banks’ ability to absorb shocks under stress. Thestress tests were conducted by the ECB in cooperation with the CSSF andthe EBA and used a baseline stress test scenario and an adverse stress testscenario. These both centred on risks facing the European financial systemfrom December 2013 to December 2016. The process for running thecommon eurozone wide stress test and AQR involved close cooperationbetween the EBA and the national competent authorities, in the case ofLuxembourg, the CSSF and the ECB. The CSSF provided information onLuxembourg institutions to the EBA to allow it to promote risks assessmentsas well as make and co-ordinate crisis simulations at EU level in order toassess the resilience of the financial institutions.

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?The AQR is a central part of the comprehensive assessment, covering around130 banks. The following Luxembourg banks took part in the EU stresstests: Banque et Caisse d’Epargne de l’Etat, Luxembourg, ClearstreamBanking, Precision Capital (Holding of Banque Internationale àLuxembourg and KBL European Private Bankers), RBC Investor ServicesBank, State Street Bank Luxembourg, and UBS (Luxembourg).

The above institutions were apparently selected on the assumption that theywould all be ‘significant supervised entities’ (which was subsequentlyconfirmed to be true, with the notable exception of Clearstream Banking)subject to direct oversight from the ECB.

4.4 How does the AQR feed into your jurisdiction’s stress tests(where relevant?)This was carried out by the ECB and the EBA with the assistance of theCSSF.

4.5 Are any supplementary banks (where relevant) being selectedfor EBA testing too?No supplementary banks were selected for EBA testing.

5. Bank supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all?As mentioned above, on November 4 2014, and as part of the bankingunion, the ECB was conferred with certain authorisation and supervisorypowers.

Going forward, banking licences will be granted by the ECB on the basis ofthe Luxembourg laws and regulations, but the CSSF will remain the firstentry point and will instruct the application file in cooperation with theECB.

In relation to the ECB’s supervisory powers, a distinction should be madebetween ’significant supervised institutions‘ and ’less significant supervisedinstitutions‘.

The ECB has direct supervisory authority over ’significant‘ banks ineurozone member states (EU member states that do not belong to theeurozone are entitled to join the SSM), as well as financial holdingcompanies, mixed holding companies and branches that are established inparticipating member states of banks established in non-participatingmember states. Significance is assessed by taking into account size,importance for the economy of the EU or particular member states, andsignificance of cross-border activities. In addition, a credit institution willbe considered ’significant‘ if it has required or received financial assistancefrom the European Financial Stability Facility or European StabilityMechanism. The ECB does, however, also have the right at any time andon its own initiative or upon request by a national authority to decide toexercise directly all the relevant powers for one or more credit institutions,even if the institution does not meet any of the ’significance‘ tests. Inaddition, the ECB must, in any event, supervise at least the three mostsignificant credit institutions in each of the participating member states.

Although the ECB has been granted direct supervisory powers with respectto a large number of Luxembourg financial institutions, the CSSF still playsan important role in assisting the ECB with its task of overseeing financialinstitutions throughout the EU.

The CSSF continues to play a role by assisting the ECB in carrying out itsrole and taking part in verification activities and day-to-day supervisorytasks. The CSSF also retains its supervisory responsibilities for tasks nottransferred to the ECB, which include consumer protection, anti-moneylaundering, payment services and supervising third country institutions thatestablish branches in their jurisdiction. The CSSF also retained discretionto impose macro prudential tools, including the various capital buffers underCRD.

The CSSF also retained its responsibility for day-to-day supervision of lesssignificant banks.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?In accordance with the SSM Regulation and the SSM FrameworkRegulation, a joint supervisory team has been established for the supervisionof each significant supervised entity or significant supervised group inparticipating member states. Each joint supervisory team is composed ofstaff members from the ECB and from the national competent authorities,including the CSSF, and works under the coordination of a JST coordinator(designated ECB staff member) and one or more national competentauthority sub-coordinators. The team members of the JST have to followthe instructions of the JST coordinator.

5.3 How will they impact the implementation of revised capital plansfollowing stress tests?This is not clear for the time being, but it is expected that the SSM willpromote a uniform approach to the implementation of capital raisingrequirements.

6. Tax treatment

6.1 Are AT1s and/or tier 2 CoCos tax deductible?In cases where they qualify as a debt instrument, coupons should be taxdeductible. CoCos are usually considered as debt instruments from aLuxembourg legal perspective. There are no specific Luxembourg lawsdealing with tax issued for hybrid instruments or CoCos.

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6.2 Are coupon payments from AT1 and/or tier 2 CoCos subjectedto withholding tax?Under Luxembourg domestic tax law, instruments which qualify as debtinstruments are not subject to withholding tax, except under the EU SavingsDirective (council directive (EU) 2014/48 of March 24 2014 amendingdirective 2003/48/EC on taxation of savings income in the form of interestpayments) under which a 35% savings withholding tax applies. This will,however, change as from January 1 2015 when Luxembourg will move toautomatic exchange of information.

In addition, since 2006, a final flat rate withholding tax of 10% is levied onthe interest income of Luxembourg resident individuals.

6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction?There have been no changes and no changes are planned in this respect forthe time being.

6.4 What is the tax treatment in terms of the capital gains on a writedown or conversion?For the issuer of a debt instrument any write-down of the principal amountof a debt will in general be a taxable gain. Exceptions notably apply in thecase of a hidden capital contribution and in the case of a financialrestructuring. If a debt instrument is converted into shares for the samevalue as the nominal value of the debt issued, the conversion will be taxneutral. If the debt instrument is converted into shares for a lower valuethan the nominal of the debt, the issuing bank realises a gain, which can beexempt in the above circumstances.


7.1 What type of loss absorbency features are/will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?The relevant legislation in Luxembourg is the European legislation. NoLuxembourg-specific rules exist for the time being since those features areregulated by the Single Rulebook directly applying across the EU.

The CRR provides that AT1 and T2 instruments will be loss absorbing uponthe occurrence of certain trigger events upon which the institutions will, inparticular, write down the principal amount of the instruments, or convertthe instruments into CET1 instruments without delay, but no later thanwithin one month,

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?Here again, reference should be made to the Single Rulebook directlyapplying within the EU. The CRR provides that CET1, AT1 and T2instruments must be loss absorbing.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?There are no additional rules in Luxembourg above those already providedfor in the European legislation to this effect.

The CRR provides certain requirements in relation to distributions. Adistinction is made between CET1 and AT1 instruments and differentrequirements apply. The Single Rulebook prepared by the EBA furtherharmonises requirements and restrictions in relation to the payment ofcoupons on a European level.

8.2 How are MDAs calculated and what happens in case of abreach?The MDAs applicable in Luxembourg will be those imposed under theCRD. The CRD foresees a prohibition for institutions that meet thecombined buffer requirement from making a distribution in connectionwith CET1 capital to an extent that it would decrease its CET1 capital toa level where the combined buffer requirement is no longer met. Institutionsthat fail to meet the combined buffer requirement are required to calculatea maximum distributable amount (MDA). The Luxembourg draft law forthe implementation of the CRD into Luxembourg law provides for acalculation of the MDA identical to that set out in the CRD.

The CRD and the draft Luxembourg law provide that institutions will,before having calculated the MDA, be prohibited from (i) making adistribution in connection with CET1 capital, (ii) creating an obligation topay variable remuneration or discretionary pension benefits or pay variableremuneration if the obligation to pay was created at a time when theinstitution failed to meet the combined buffer requirements, and, (iii)making payments on AT1 instruments.

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/CRD IV requires? What are the relevant ratios anddates?It is not expected that the leverage ratios will be implemented inLuxembourg sooner than required by EU regulations. At this stage, nomandatory leverage ratio applies and the obligations of banks in that regardare limited to mere reporting obligations.

The CRR provides that the leverage ratio will be calculated as an institution’scapital measure divided by that institution’s total exposure measure and willbe expressed as a percentage. Institutions are required to calculate theleverage ratio as the simple arithmetic mean of the monthly leverage ratiosover a quarter. The CRR provides for a derogation to this rule whereby thenational competent authorities may, during the period from January 1 2014to December 31 2017, calculate a leverage ratio that is an arithmetic meanof the monthly leverage ratios over a quarter.

The CSSF has clarified in the CSSF Regulation that it will not make use ofthis derogation and consequently the methods provided for in the CRR areapplicable in Luxembourg. The CRR requires Luxembourg institutions tosubmit to the CSSF all necessary information on their leverage ratios. Thisinformation will be communicated by the CSSF to the EBA upon itsrequest.

The EBA, in the context of the Single Rulebook, has prepared implementingtechnical standards for the disclosure of leverage ratios. The disclosureframework consists of four templates: (i) a table reconciling the figures ofthe leverage ratio denominator with those reported under the relevantaccounting standards; (ii) a table providing a breakdown of the leverage ratiodenominator by exposure category; (iii) a table providing a furtherbreakdown of the leverage ratio denominator by group of counterparty; and,(iv) a table with qualitative information on leverage risk.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?The rules applicable in Luxembourg are identical to those provided in theCRR. This regulation provides that the leverage ratio will be calculated asan institution’s capital measure, which will be the tier 1 capital, divided bythat institution’s total exposure measure and will be expressed as apercentage. This should therefore cover both CET1 instruments and AT1instruments.

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10. Mutuals/Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements?There are no rules applicable in Luxembourg other than the generalapplication of the European legislation in this respect. The CRR providesfor rules in relation to capital instruments issued by mutuals, cooperativesocieties, savings institutions and similar institutions. The regulation setsout the conditions for those instruments to qualify as CET1 as well as forthe redemption of the instruments. The EBA has also prepared regulatorytechnical standards (Commission Delegated Regulation (EU) no. 241/2014of January 7 2014 supplementing regulation (EU) no. 575/2013 of theEuropean Parliament and of the Council with regard to regulatory technicalstandards for own funds requirements for institutions) specifyingrequirements for mutuals which are directly applicable in Luxembourg.

10.2 Have additional rules and regulations been issued in relationto Sifis?There are no general rules in place in Luxembourg in relation to the capitalrequirements applicable to Sifis. The preamble to the CRR does, however,state that competent authorities should be empowered to impose highercapital requirements for systemically important institutions that are able,due to their business activities, to pose a threat to the global economy. Thedraft law that, once adopted by the Luxembourg parliament, will implementthe CRD, provides for the power for the CSSF to impose higher bufferrequirements and certain buffer requirements applicable specifically to globaland other systemically important institutions. In the framework of the SSM,the ECB may also impose specific rules applicable to Sifis. The CSSF mayalso, on an individual level, demand additional capitalisation within theframework of pillar requirements. No banks have been identified as Sifis orO-SIIs in Luxembourg for the time being.


11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?There are no recent examples of regulatory intervention proper inLuxembourg. Nevertheless, there have been several cases of interventionfrom the Luxembourg public authorities in the form of public support inthe case of both the Dexia and Fortis groups.

Dexia BIL was part of the Dexia group, which benefitted from state supportfrom France, Belgium and Luxembourg, in 2008/2009 in the form of arecapitalisation, guarantees on funding and a guarantee on impaired assets.

Similarly for Fortis, Belgium, Luxembourg and the Netherlands took a seriesof bail-out measures.

Meanwhile, Dexia BIL (now BIL) has been sold to Precision Capital whereasFortis Bank Luxembourg (now BGL BNP Paribas) has been purchased bythe BNP Paribas group. The Luxembourg government retains a minorityshareholding in both banks.

In addition, a suspension of payment measure was taken by the Luxembourgcourts and administrators were appointed for each of LandsbankiLuxembourg, Glitnir Luxembourg, and Kaupthing Luxembourg in 2008.Glitnir Luxembourg was eventually subject to voluntary liquidation, whereasKaupthing Luxembourg split into two entities (one bank, now BanqueHavilland and one securitisation undertaking). Landsbanki Luxembourgbecame subject to judicial liquidation.

12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?Under the CSSF Circular 07/301, all credit institutions and investmentfirms incorporated under Luxembourg law and branches of non-EU creditinstitutions and investment firms are required to implement an internalcapital adequacy assessment process (ICAAP). ICAAP is defined in thecircular as a system of sound, effective and complete strategies and processesallowing credit institutions to continuously assess and maintain theamounts, types and distribution of internal capital that they consideradequate to cover the nature and level of risks to which they are or mightbe exposed. The ICAAP consists of two key parts: (i) internal processes foridentifying, measuring, managing and reporting the risks to which theinstitution is exposed (allowing the institution to control its risks and toassess its internal capital needs); and, (ii) an internal process for capitalplanning and capital management which allows the institution to ensurecontinuous internal capital adequacy.

12.2 If so, what are the disclosure requirements around pillar 2, ifany?According to the CSSF Circular, the CSSF will, at least once a year, evaluatethe risks to which institutions are or could be exposed and assess to whatextent the institutions’ internal processes, internal capital and prudentialown funds ensure an adequate management and coverage of these risks. Theauthorised management of an institution is required to inform the board ofdirectors on the institution’s situation of risks and internal capital, in theform it deems most appropriate and at least once a year. This report will besubmitted to the CSSF by the authorised management on an annual basis,on its own initiative. This information, which must be comprehensible tothird parties, will be completed, if need be and upon request of the CSSF,by internal documents, meetings and on-site inspections, notably when theabove report does not allow the CSSF to fully evaluate the internal capitaladequacy.

This information is not published and there are no requirements to make itavailable to the public under the European or Luxembourg regulations. Itis expected that the CSSF will prepare and publish a regulation on pillar 2requirements in the near future, but not that any publication requirementswill be imposed.


13.1 Are there any local provisions that could trigger earlyredemption?There are no specific provisions in Luxembourg above what is foreseen ona European level.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?There are no specific provisions in Luxembourg above what is foreseen ona European level. The CRR provides for the types of credit derivatives, andinstruments that may be composed of credit derivatives or that areeconomically effectively similar, as eligible credit protection by institutions.

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15. Bank recovery/Bail-in

15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?The BRRD has not yet been implemented into Luxembourg law althoughwe understand that a draft law is being prepared for submission to theLuxembourg parliament. The deadline for implementation intoLuxembourg law is January 1 2015, except for the bail-in tool which willbe implemented by January 1 2016 at the latest.

There are no comprehensive recovery or bail-in tools in Luxembourg forthe time being.

Alongside the BRRD, a European regulation providing for the establishmentof a Single Resolution Mechanism and a Single Resolution Fund has beenadopted (regulation (EU) no. 806/2014 of the European Parliament and ofthe Council of July 15 2014) establishing uniform rules and a uniformprocedure for the resolution of credit institutions and certain investmentfirms in the framework of a Single Resolution Mechanism and a SingleResolution Fund and amending regulation (EU) no. 1093/2010 (the SRMRegulation). The SRM, which, alongside the Single Rulebook and the SSM,is a pillar of the banking union, is a centralised eurozone resolutionmechanism.

It is intended to ensure that any resolution costs must first be borne by acredit institution’s shareholders and creditors and the Single Bank ResolutionFund would be financed by contributions from the banking sector beforeany event triggering a resolution, building a strong shield to protecttaxpayers and avoiding contagion of other parts of the Euro area and theSingle Market. The SRM Regulation will be gradually applicable, withcertain provisions being applicable from August 19 2014, November 1 2014and January 1 2015 and will be fully applicable from January 1 2016onwards.

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?No statements have been made in this respect so far. This will be providedfor in Luxembourg law once the BRRD has been fully implemented.

16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?No stricter rules are anticipated for the time being in Luxembourg.

About the authorPatrick has been a partner at Linklaters in Luxembourg since 2001 andheads the office’s capital markets and banking group.

He specialises in banking matters (credit and taking of security),structured finance (including tax-based and fund-linked products) andasset finance/securitisation.

Patrick is also widely recognised for his expertise in AML, regulatoryissues and R&I matters.

He sits on several industry committees in the financial sector.

Patrick GeortayPartner, Linklaters

LuxembourgE: [email protected]: www.linklaters.com

About the authorCathrine is an associate in the capital markets and banking practice ofLinklaters in Luxembourg, which she joined in 2011.

She regularly advises on banking matters, in particular syndicated loans,asset finance, leveraged acquisition finance, refinancing andrestructuring.

Cathrine’s expertise also includes regulatory as well as capital marketswork, namely MTN programmes, securitisation vehicles, high yieldbond issuances and listing on the Luxembourg Stock Exchange.

Cathrine Foldberg MøllerAssociate, Linklaters

LuxembourgE: [email protected]: www.linklaters.com


1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?The Dutch central bank (De Nederlandsche Bank, the DNB) has beenappointed by the Dutch legislator as the national competent authorityresponsible for monitoring and enforcing compliance with the requirementsimposed under CRD IV and the CRR, subject to the powers of the ECBunder the Single Supervisory Mechanism (the SSM).


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?No, except that the member certificates issued by cooperatives qualify asCET1 according to the EBA list with approved CET1 instruments (asidefrom CRR grandfathering for existing instruments).

2.2 What instruments qualify as AT1 capital?Hybrid debt securities that meet the conditions of article 52 of the CRRqualify as AT1 capital.

2.3 What are the phase-in rules with respect to the deduction ofdeferred tax assets of own funds?DNB has issued the following phase-in rules for the deduction of deferredtax assets. Deduction of deferred tax assets that rely on future profitabilityand arise from temporary differences are phased-in as follows: 0% for 2014,10% for 2015, 20% for 2016, 30% for 2017, 40% for 2018, 50% for 2019,60% for 2020, 70% for 2021, 80% for 2022, 90% for 2023 and 100%from January 2024 onwards. The deduction of deferred tax assets that relyon future profitability and do not arise from temporary differences arephased-in as follows: 20% for 2014, 40% for 2015, 60% for 2016, 80%for 2017 and 100% for 2018.


3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation?The combined buffer requirement contains (i) the capital conservationbuffer set at 2.5% according to the CRR, (ii) an institution-specific counter-cyclical capital buffer, (iii) a G-SII buffer, (iv) an O-SII buffer, and, (v) asystemic risk buffer.

The Dutch legislator has made use of the member state option to introducethe systemic risk buffer requirement. DNB is appointed as the authority incharge of identifying G-SIIs and O-SIIs in The Netherlands anddetermining the applicable level of the institution-specific counter-cyclicalcapital buffer, the O-SII buffer and the systemic risk buffer in line withCRD IV. On April 29 2014, DNB issued a press release announcing thatthe systemic risk buffer would be 3% for ABN Amro Bank, ING Bank andRabobank and 1% for SNS Bank.

The combined buffer requirement will be phased in from 2016 to 2019 asfollows: 25% in 2016, 50% in 2017, and 75% in 2018, with full applicationfrom January 2019. The Dutch government did not implement the capital

buffer requirement earlier than determined in CRD IV. The relevantlegislation related to the implementation of the capital buffer requirementsis the Financial Markets Supervision Act (Wet op het financieel toezicht) (theFMSA) and its subordinate and implementing decrees and regulations.

3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?The minimum capital trigger is 5.125% CET1 ratio, as required by article54 (1)(a)(i) CRR.

3.3 How is the PONV defined in your jurisdiction?In anticipation of BRRD implementation into Dutch law, in June 2012 theDutch legislator introduced the Intervention Act (Interventiewet). Theconcept of PONV in the Intervention Act is referred to as an ’ailinginstitution‘ (probleeminstelling). An institution becomes an ailing institutionwhen DNB determines that the solvency or liquidity of the institution isapproaching a non-viable status, without reasonable prospects of recovery.

3.4 What are the grandfathering provisions and how are theyimplemented?Grandfathering provisions are implemented in chapter 5 of the Regelingspecifieke bepalingen CRD IV en CRR, a regulation by DNB. For 2014, theCET1 ratio is set at 4.5% and the tier 1 ratio at 6%. The percentageslimiting the amounts of capital of non-qualifying instruments eligible forgrandfathering under article 486 CRR are: 80% for 2014, 70% for 2015,60% for 2016, 50% for 2017, 40% for 2018, 30% for 2019, 20% for 2020and 10% for 2021.

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding? There are no publicly-disclosed results expected from previous stress tests.

4.2 Which national body is conducting the tests?The DNB.

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?The EBA included the following Dutch banks as sample banks for its 2014EU-wide stress test: ABN Amro Bank, ING Bank, Rabobank, SNS Bank,Bank Nederlandse Gemeenten and the Nederlandse Waterschapsbank. Thesame banks with the addition of RBS Netherlands were selected for thecomprehensive assessment, coordinated by the ECB under article 33 ofCouncil Regulation (EU) No 1024/2013 of October 15 2013 conferringspecific tasks on the ECB concerning policies relating to the prudentialsupervision of credit institutions.

4.4 How does the AQR feed into your jurisdiction’s stress tests(where relevant?)This has not been disclosed.

THE NETHERLANDS


The Netherlands

Jurgen van der Meer and Harm Hommes, Clifford Chance

www.cliffordchance.com

THE NETHERLANDS


4.5 Are any supplementary banks (where relevant) being selectedfor EBA testing too?See question 4.3.

5. Bank Supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all? In connection with the introduction of the SSM, it was announced to makethe following changes to DNB’s organisation: (i) rearranging the allocationof specific responsibilities between the board members, (ii) decreasing thenumber of board members from five to four, (iii) rearranging the existingfive divisions and increasing the number of divisions to seven, and, (iv)reducing the span of control of its knowledge-intensive departments.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?As set out at EU level.

5.3 How will they impact the implementation of revised capital plansfollowing stress tests? This is unclear.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?Under prevailing law, AT1 debt is regarded by the tax authorities as non-deductible. Proposed AT1 legislation provides for tax deductibility. Tier 2CoCos may be tax-deductible if they have a fixed maturity of 50 years orless (and provided they rank senior to share capital).

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?The application of withholding tax is, in principle, aligned with the taxdeductibility, under prevailing law as well as proposed law (that is,deductibility should mean no withholding tax).

6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction? A proposal has been submitted to parliament to facilitate tax deductibility(and exemption from withholding tax) for AT1 instruments (unless from acorporate law perspective the instrument qualifies as share capital). Tier 2capital is not addressed in the proposal. The proposal provides retroactiveapplication as from January 1 2014. The proposal does not cater for anexemption for gains realised upon a write-down.

6.4 What is the tax treatment in terms of the capital gains on a writedown or conversion?In the event of a write-down, the issuer will have to recognise taxable income(the implications of which may depend on available tax losses at that time).In the event of conversion into CET1 capital, the issuer should typicallynot recognise taxable income.


7.1 What type of loss absorbency features are/ will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?There is no specific local regulation that requires inclusion of loss absorbencyfeatures in AT1 and T2 instruments in addition to the CRR and the BRRD.Pending implementation of the BRRD, the Intervention Act (which will bereplaced and/or supplemented by the BRRD) gives the minister of financepowers to expropriate holders of capital instruments.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?No. Instruments qualifying as tier 2 capital under article 63 CRR do notrequire going concern loss absorption features.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon? Yes. As well as CRD IV-implemented powers of the regulator to requirecoupon cancellation and restrictions on coupon payments following abreach of the combined buffer requirement in a going concern, the usualcorporate tests imposed on the company, similar to dividend payments,apply to coupon payments under AT1 instruments.

8.2 How are MDAs calculated, and what happens in case of abreach?The calculation method for MDAs, as prescribed by CRD IV, isimplemented in article 2:2:1 (3) and (4) of the Regeling specifieke bepalingenCRD IV en CRR.

In the case of a breach of the combined buffer requirement, MDArestrictions apply, DNB must be notified and a capital conservation planmust be prepared and approved by DNB. Furthermore, the regulator hasenforcement tools based on existing national regulation and the powersbased on pillar 2 supervision.

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?The Dutch government is lobbying for an increase in the proposed EU-wide 3% leverage ratio to 4% at EU level. If unsuccessful, the Dutchgovernment is expected to favour using national discretion to increase theleverage ratio to 4% for Dutch banks. Currently, there are no indicationsthat the leverage ratio will be implemented sooner than Basel III/CRD IV.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?Unknown.

10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements? DNB has not publicly disclosed specifically how mutuals can comply withthe CRR.

10.2 Have additional rules and regulations been issued in relationto Sifis in addition to European rules? ING Bank was identified as a G-SIB by the FSB in November 2014. DNBhas not publicly disclosed specifically how Sifis can comply with the CRR.


11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?The Netherlands has seen a number of instances where the Dutchgovernment has intervened since the credit crisis in 2008. In October2008 the state of The Netherlands acquired the shares of Fortis BankNederland, ABN AMRO Bank and the Dutch insurance activities ofFortis. Subsequently, a number of financial institutions (ING Bank,Aegon, and SNS Reaal) received a capital contribution by means of theissuance of core tier 1 capital instruments to the state of The Netherlands.In 2009 the state of The Netherlands intervened by entering into aguarantee facility with respect to the Alt-A portfolio of ING Bank. The

THE NETHERLANDS


most recent intervention, which was based on the Intervention Act, relatedto the nationalisation of SNS Reaal in February 2013.

12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?Yes, the requirements regarding pillar 2 under CRD IV are reflected in theFMSA and its implementing decrees.

12.2 If so, what are the disclosure requirements around pillar 2, ifany? There is no specific local legislation.


13.1 Are there any local provisions that could trigger earlyredemption?Yes, there are local provisions that could trigger early redemption, but it ispossible to structure the instruments in such a way that these local provisionsdo not apply.

13.2 Article 78 of the CRR specifies a number of reasons for earlyredemption, including changes in the regulatory classification andapplicable tax treatment. Does local regulation elaborate on this, oradd any other provisions that would allow for early redemption?No, local rules do not elaborate on this.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?No.

15 Bank recovery/ bail-in

15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?The Dutch legislator is not likely to meet the first deadline for theimplementation of the BRRD of January 1 2015. Plans for implementationare unclear, as no public draft of the implementation legislation has beenpublished to date. The first submission to parliament is expected early 2015.

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?The authorities have not specified how to value a bank and its assets.

About the authorJurgen van der Meer holds the position of counsel in the finance &capital markets practice of Clifford Chance Amsterdam. He hasspecialised in securities and financial services-related work for over adecade, with an emphasis on regulatory compliance, international debtcapital markets offerings and capital solutions. Jurgen advises bothissuers and dealers/arrangers across the FIG, corporate and (semi-)public sectors. In particular, he focuses on balance sheet restructuringand capital issuance for financial institutions, advising on international,high-impact regulation, such as CRD IV, Solvency II, BRRD andBanking Union.

Jurgen van der MeerCounsel, Clifford Chance

Amsterdam, The NetherlandsT: + 31 (0)20 7119 340E: [email protected] W: www.cliffordchance.com

About the authorHarm Hommes is an associate in the finance & capital markets practiceof Clifford Chance Amsterdam and specialises in securities and financialservices-related work, with an emphasis on bank regulatory capital.Harm has an academic background both in law and finance. Harm is amember of the team that guides clients through high impact regulatorychanges, such as CRD IV, Solvency II, BRRD and Banking Union.

Harm HommesAssociate, Clifford Chance

Amsterdam, The NetherlandsE: [email protected]: www.cliffordchance.com

SPAIN



1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?Banco de España is the supervisory authority of credit entities, whileComisión Nacional del Mercado de Valores is the supervisory authority ofinvestment firms.

Banco de España will exercise its functions without prejudice to the tasksentrusted to the European Central Bank (ECB) and in cooperation with itunder Council regulation (EU) No 1024/2013, of October 15 2013conferring specific tasks on the ECB concerning policies relating to theprudential supervision of credit institutions.

The CRR became applicable from January 1 2014 and the CRD IVdirective has been partially implemented in Spain by royal decree law14/2013 of November 29 (RD-L 14/2013) and by law 10/2014 of June 26,on regulation, supervision and solvency of credit entities (Ley 10/2014, de26 de junio, de ordenación, supervisión y solvencia de entidades de crédito) (Law10/2014). RD-L 14/2013 has repealed, with effect from January 1 2014,any Spanish regulatory provisions that may be incompatible with the CRR.

In addition to RD-L 14/2013, on January 31 2014, the Bank of Spainapproved a new circular 2/2014 (Circular 2/2014), which makes certainregulatory determinations contained in the CRR under the delegationcontained in RD-L 14/2013. These include relevant rules concerning theapplicable transitional regime on capital requirements and the treatment ofdeductions.


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?Under Law 10/2014, the following entities are considered to be creditinstitutions: (a) banks; (b) savings banks; (c) credit cooperatives; and, (d)Instituto Oficial de Crédito (which is not subject to the CRD IV directive).Mutuals are not recognised as credit institutions under Spanish law.

Common shares and instruments convertible into common shares issuedunder Law 9/2012 (as defined below) and subscribed to by the Fund forOrderly Bank Restructuring, or Fondo de Restructuración Ordenada Bancaria(FROB), are the only instruments eligible to qualify as CET1 for banksunder the list published by the EBA on May 28 2014.

Cooperative shares (aportaciones al capital social) and instruments convertibleinto cooperative shares issued under Law 9/2012 (as defined below) andsubscribed to by the FROB and the endowment fund (fondo fundacional)of savings banks qualify as CET1 of credit cooperatives and savings banks,respectively, under the EBA list.

Under article 36.1 of the CRR, institutions will deduct DTAs that rely onfuture profitability from CET1.

Compared to other countries, Spanish tax law is strict when determiningwhether expenses are tax-deductible.

RD-L 14/2013, which amended the Law on Corporate Income Tax,introduced the following measures regarding DTAs: (i) a new specialtemporary allocation rule for certain adjustments; and, (ii) a measure forthe conversion of certain DTAs into directly enforceable credits against theSpanish tax authorities when certain conditions are met.

As a result of the new special temporary allocation rule, reversals of theallowances and impairment to which this rule applies will not give rise to atax loss for the taxpayer. This will enhance the calculation of the regulatorycapital of credit institutions.

The conversion of DTAs into directly enforceable credits against the Spanishtax authorities means that the institution would not be obliged to deductthem from its CET 1, and it would apply a risk weighting of 100% to suchDTAs.

2.2 What instruments qualify as AT1 capital?Participaciones preferentes issued in accordance with Law 10/2014 will qualifyas AT1 capital. Participaciones preferentes issued in accordance with Law10/2014 must comply with the requirements of article 52 of the CRR, andin addition in order to benefit from a favourable tax treatment:

(i) they must be issued by a Spanish credit entity or a fully-owned subsidiaryof the Spanish credit entity, which is resident in Spain or in the EU(excluding tax havens) and whose exclusive corporate object or activity isthe issuance of participaciones preferentes;(ii) in the case of an issue through a subsidiary, the issue proceeds (afterdeducting issue expenses) must be invested in full with the parent creditentity and be affected by the risks and financial position of the parent creditentity and its consolidating group or sub-group;(iii) they must not grant voting rights (save in the exceptional circumstancescontemplated in the conditions);(iv) they must not confer pre-emption rights;(v) they must be listed on a regulated market, multilateral trading facilityor other organised market;(vi) in case of a public offer, there must be a tranche (consisting of at least50% of the issue) addressed exclusively to no fewer than 50 professionalinvestors; and,(vii) if the issuer is not listed, the nominal value of the participacionespreferentes must be at least €100,000 ($125,000), and if the issuer is listed,the nominal value must be at least €25,000.


3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation?Articles 43 to 49 of Law 10/2014 implement the combined bufferrequirements, broadly, comprising a combination of the capital conservationbuffer, the institution-specific counter-cyclical buffer, the global systemicallyimportant institutions buffer, the other systemically important institutionbuffer and the systemic risk buffer. Additionally, Law 10/2014 provides forfurther regulatory development of those articles. In May 2014 a draft royaldecree was submitted for public consultation. However, this secondarylegislation has not been approved yet.

Spain

Yolanda Azanza and Roberto Grau, Clifford Chance

www.cliffordchance.com

SPAIN


The capital conservation buffer and the institution-specific counter-cyclicalbuffer will not apply until January 1 2016 and will be phased in from 2016to 2018 as follows:

a) during the period from January 1 2016 to December 31 2016: 0.625%;b) during the period from January 1 2017 to December 31 2017: 1.25%;and,c) during the period from January 1 2018 to December 31 2018: 1.875%.

The global systemically important institutions buffer and the othersystemically important institutions buffer will be applicable starting fromJanuary 1 2016. The global systemically important institutions buffer willbe phased in from 2016 to 2019 as follows:

(a) 25% in 2016;(b) 50% in 2017;(c) 75% in 2018; and,(d) 100% in 2019.

3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?Law 10/2014, which regulates participaciones preferentes, cross refers to theCRR under which the minimum required trigger is 5.125%. Theparticipaciones preferentes issued by Banco Santander and BBVA during 2014use the minimum required trigger of 5.125%.

3.3 How is the PONV defined in your jurisdiction? Law 9/2012, of November 14 2012 (Law 9/2012) established a new regimeon the restructuring and resolution of credit institutions and a statutory lossabsorbency regime applicable within the framework of restructuring andresolution processes, both based on the legislative proposal for a directiveproviding for the establishment of an EU-wide framework for the recoveryand resolution of credit institutions and investment firms. The first draft ofthe legislative proposal (and the draft upon which Law 9/2012 was based)was published by the European Commission on June 6 2012.

Under article 20 of Law 9/2012, a credit institution will be deemed to benon-viable if:

a) the institution is in any of the following circumstances:i) the institution fails to meet, or is reasonably likely in the nearfuture to fail to meet, solvency requirements; or,ii) the institution’s liabilities exceed its assets, or are reasonablylikely to do so in the near future; or,iii) the institution is unable, or is reasonably likely in the nearfuture to be unable, to meet its obligations as they fall due; and,

b) it is not reasonably likely that the institution may redress the situationwithin a reasonable timeframe by its own means, by resorting to the marketsor by means of the financial support provided for under Law 9/2012.

In considering whether an institution is non-viable or is reasonably likelyto be so in the near future, the financial position of the group, if any, ofwhich it forms part will also be taken into account.

It is presently unclear what the implications of the implementation of theBank Resolution and Recovery Directive (BRRD) will be for the lossabsorption measures introduced in Spain by Law 9/2012 and to what extent,if at all, the provisions of Law 9/2012 may need to change to implementthe BRRD.

3.4 What are the grandfathering provisions and how are theyimplemented?Existing capital instruments which do not qualify under the CRR are subjectto the grandfathering provisions contained in chapter 2 of title I of part tenof the CRR.

In terms of local rules, rule 16 of Circular 2/2014 has determined thefollowing percentages within the ranges referred to in paragraph 5 of article486 of the CRR:

(a) 80% during the period from January 1 2014 to December 31 2014;(b) 70% during the period from January 1 2015 to December 31 2015;(c) 60% during the period from January 1 2016 to December 31 2016;(d) 50% during the period from January 1 2017 to December 31 2017;(e) 40% during the period from January 1 2018 to December 31 2018;(f ) 30% during the period from January 1 2019 to December 31 2019;(g) 20% during the period from January 1 2020 to December 31 2020;and,(h) 10% during the period from January 1 2021 to December 31 2021.

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding? Spanish banks participated in the 2014 EU-wide stress test conducted bythe EBA in coordination with Banco de España and the ECB. No other orfurther tests have been announced in Spain.

In 2010 and 2011 stress tests at European level were undertaken.Information can be found on the web page of Banco de España.

In 2012, Banco de España, in collaboration with the ministry of economyand competitiveness hired Roland Berger and Oliver Wyman as independentconsultants to carry out an external top-down analysis to evaluate theSpanish banking sector’s resilience to a forceful additional deterioration inthe economy. The results of the top-down stress test of the Spanish bankingsector were released on June 21 2012.

Later, a bottom-up exercise (a bank-by-bank stress test), intended todetermine the precise capital needs of individual banks, was conducted byan external consultant (Oliver Wyman), based on the input from fourindependent auditors (Deloitte, PwC, Ernst & Young and KPMG). Theresults of this bottom-up exercise were published on September 28 2012.

4.2 Which national body is conducting the tests?The national competent authority is Banco de España.

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?The 2014 EU-wide stress test exercise was carried out on a sample of bankscovering at least 50% of the national banking sectors in each EU memberstate, as expressed in terms of total consolidated assets as at the end of 2013.

On January 31 2014, the EBA announced the EU-wide stress test sampleof banks, which included the following Spanish institutions: Banco BilbaoVizcaya Argentaria, Banco de Sabadell, Banco Financiero y de Ahorros,Banco Mare Nostrum, Banco Popular Español, Banco Santander, Bankinter,Caja de Ahorros y M.P. de Zaragoza, Aragón y Rioja, Caja de Ahorros yPensiones de Barcelona, Caja España de Inversiones, Salamanca y Soria,CAMP, Cajas Rurales Unidas, Sociedad Cooperativa de Crédito, CatalunyaBanc, Kutxabank, Liberbank, MPCA Ronda, Cádiz, Almería, Málaga,Antequera y Jaén, and NCG Banco.

SPAIN


4.4 How does the AQR feed into your jurisdiction’s stress tests(where relevant?)Not relevant.

4.5 Are any supplementary banks (where relevant) being selectedfor EBA testing too?There are no other banks (in addition to those indicated by the EBA) whichare being stress tested.

5. Bank Supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all? On September 4 2014, the ECB published a list of the supervised entitiesand supervised groups which it began to directly supervise as of November4 2014 (significant supervised entities and significant supervised groups).

The Spanish significant supervised entities and significant supervised groupsare: Banco Bilbao Vizcaya Argentaria, Banco de Sabadell, Banco Financieroy de Ahorro, Banco Mare Nostrum, Banco Popular Español, BancoSantander, Bankinter, Caja de Ahorros y M.P. de Zaragoza, Aragón y Rioja,Caja de Ahorros y Pensiones de Barcelona, Banco de Crédito SocialCooperativo, Catalunya Banc, Kutxabank, Liberbank, Banesco HoldingHispania, and Unicaja Banco.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?There is no information available on this.

5.3 How will they impact the implementation of revised capital plansfollowing stress tests? It is uncertain.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?As a general rule, the tax deductibility of financial instruments relates totheir accounting treatment. In essence, that means that tax deductibility islinked to the existence of a charge in the P/L account of the issuer.

There is an exception for participaciones preferentes issued in accordance withLaw 10/2014 where the tax deductibility does not depend on its accountingtreatment. However, although a tax reform is now being discussed inparliament, the tax deductibility of participaciones preferentes is likely toremain as it currently stands.

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?No withholding taxes apply to non-Spanish resident-holders provided thatthe issuer complies with certain reporting requirements related to thesecurities.

6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction? Several changes in recent years have made the taxation of these securitiesmore efficient for non-Spanish investors. A change made in 2014 hasallowed unlisted Spanish corporate issuers to apply the privileged tax regimecontained in Law 10/2014 to any issuance of listed debt securities, so thatpayments of interest made to non-Spanish residents are exempt fromwithholding tax in Spain.

In principle, no more changes are envisaged in relation to AT1 and T2securities.


7.1 What type of loss absorbency features are/ will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?AT1 and T2 are subject to the requirements of the CRR, which arecontained in articles 52 and 63, respectively. With respect to AT1, and underarticle 52.1.n, upon the occurrence of a trigger event, the principal amountof the instruments must be written-down on a permanent or temporarybasis, or the instruments must be converted to CET1 instruments. Theparticipaciones preferentes issued by Banco Santander and BBVA during 2014are convertible if the CET1 capital ratio falls below 5.125%.

Chapter VII of Law 9/2012 regulates a set of measures targeted at ensuringthat shareholders and subordinated creditors (such as holders ofparticipaciones preferentes or convertible bonds, subordinated bonds or anyother subordinated financing, with or without maturity) bear losses througha burden-sharing mechanism within the framework of restructuring andresolution processes. These measures could be taken voluntarily by theinstitution or be imposed by the FROB, without the consent of thoseholding the relevant securities. Measures include redemption in part or inwhole of the securities or liabilities involved, write-downs of their nominalvalue, or their exchange for other securities.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?Regulatory capital (including tier 2) may be subject to the loss absorptionmeasures under Law 9/2012.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?There are no additional local rules.

8.2 How are MDAs calculated, and what happens in case of abreach?Article 48 of Law 10/2014 deals with restrictions on distributions.According to this article, if an institution fails to comply with the combinedbuffer requirement, it will be prohibited from paying any discretionarypayments (that is, making payments relating to CET1, variableremuneration, and payments on AT1), until it calculates the maximumdistributable amount (MDA) and communicates it to Banco de España.The method of calculating the MDA is subject to further secondarylegislation. It is unclear as to when that secondary legislation will beapproved and enter into force.

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?No, it is not expected that the leverage ratio will be implemented soonerthan Basel III/CRD IV requires.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?Institutions will calculate their leverage ratio in accordance with themethodology set out in paragraphs 2 to 11 of article 429 of the CRR. Thecapital measure will be the tier 1 capital. The format and frequency ofreporting on leverage ratio on an individual and a consolidated basis isprovided for under Commission Implementing Regulation (EU) No.680/2014, of April 16 2014.

SPAIN


10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements? Mutuals are not recognised as credit institutions under Spanish law.

10.2 Have additional rules and regulations been issued in relationto Sifis? There are no additional rules and regulations in relation to Sifis. OnNovember 6 2014 the Financial Stability Board and the Basel Committeeon Banking Supervision updated the list of global systemically importantbanks which include Spanish entities BBVA and Banco Santander.


11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?The restructuring of the Spanish banking sector (in particular, savingsbanks) started in 2009.

Caja Castilla la Mancha was placed under official administration in March2009 by the Banco de España and awarded to Cajastur in November 2009.

CajaSur was was placed under official administration in May 2010 by theBanco de España and awarded to BBK in July 2010.

CAM was placed under official administration by the Banco de España inJuly 2011 and awarded by the FROB to Banco Sabadell in December 2011.

Unnim was fully controlled by the FROB at one point and was awarded toBBVA in March 2012.

In November 2012, the European Commission approved the restructuringplans of the banks owned by the FROB at that time (BFA/Bankia,Catalunya Caixa, NCG Banco and Banco de Valencia).

Banco de Valencia was awarded to CaixaBank by the FROB in December2012.

NCG Banco was auctioned and awarded to Banesco in December 2013.

In December 2012, the European Commission approved the restructuringplans of Liberbank, Caja3, Banco Mare nostrum (BMN) and Banco CEISS(banks with capital shortfalls unable to meet those capital shortfalls privatelywithout having recourse to state aid).

12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?Articles 73 and 74 of CRD IV have been implemented through articles 41,29 and 30 of Law 10/2014. Although the secondary legislation developingLaw 10/2014 is still pending, there are existing provisions still in force whichmust be taken into account. These are articles 66 (organisation, riskmanagement and internal control requirements), 67 (risk managementpolicy) and 68 (internal capital adequacy assessment process) of royal decree216/2008, of February 15, on own funds of financial institutions and therules contained in chapter ten on internal governance and capital assessmentof circular 3/2008, of May 22, of Banco de España, on the determinationand control of minimum regulatory capital.

Under article 30 of Law 10/2014, institutions will have to elaborate andkeep updated a Plan General de Viabilidad (General Viability Plan) providingfor the measures to be adopted to restore the viability and financialsoundness of the institutions in case they suffer serious deterioration. Thisplan will be submitted for the approval of the Banco de España and maysubsequently require amendments and to impose within it the measures

provided for under Law 9/2012, if Banco de España considers the planinsufficient. Secondary legislation will establish the content of the PlanGeneral de Viabilidad (General Viability Plan).

12.2 If so, what are the disclosure requirements around pillar 2, ifany? Under article 85 of Law 10/2014, entities will have to make public at leastannually a document named ’Información con relevancia prudencial‘(prudential relevance information). This document must contain concretedata on the entity’s financial situation and activities in which the marketand other parties may be interested, to evaluate its risks, market strategy,risk control, internal organisation and situation for the purposes ofcomplying with the minimum required capital under solvency rules.

As regards AT1 instruments, and under article 54.5 of the CRR, when atrigger event occurs institutions will:

(a) immediately inform the competent authorities;(b) inform the holders of the AT1 instruments; and,(c) write-down the principal amount of the instruments, or convert theinstruments into CET 1 instruments within a period of one month.

Under article 48 of Law 10/2014, credit entities that fail to meet thecombined buffer requirement will have to calculate the MDA using theterms to be established by secondary legislation. Credit entities will beprevented from undertaking any of the following actions before they havecalculated the MDA and sent notification of it to Banco de España:

(a) making a distribution in connection with CET 1 capital;(b) creating an obligation to pay variable remuneration or discretionarypension benefits or pay variable remuneration if the obligation to pay wascreated at a time when the institution failed to meet the combined bufferrequirements; and,(c) making payments on AT1 instruments.

If an institution fails to meet or exceeds its combined buffer requirement,it will be prevented from distributing more than the MDA through anyaction referred to under (a), (b) and (c) above.

Where a credit entity fails to meet its combined buffer requirement, it willprepare a capital conservation plan and submit it to Banco de España nolater than five working days after it identified that it was failing to meet thatrequirement, unless Banco de España authorises an extension of up to amaximum of 10 days.


13.1 Article 78 of the CRR specifies a number of reasons for earlyredemption, including changes in the regulatory classification andapplicable tax treatment. Does local regulation elaborate on this, oradd any other provisions that would allow for early redemption? No, there are no applicable local provisions.

14. CDS contracts

14. Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?There are no local rules in addition to those provided for under the CRR.

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15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?As indicated in 3.3 above, it is unclear to what extent, if at all, the provisionsof Law 9/2012 may need to change to implement the BRRD. The BRRDis to be transposed into EU member countries’ national laws by year-end2014, and enter into force on January 1 2015.

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?Before the adoption of any restructuring or resolution measure and, inparticular, for the purposes of the application of the instruments envisagedin Law 9/2012, the FROB will determine the economic value of theinstitution or of the corresponding assets and liabilities on the basis ofvaluation reports obtained from independent experts.

The objective of the valuation will be to determine the economic value ofthe institution or of the corresponding assets and liabilities, so that any lossesthat may arise from the application of the instruments to be used can berecognised. This valuation will serve as a baseline whenever public financialsupport is granted to an institution.

The valuation will be subject to procedures and carried out in accordancewith criteria as determined by the FROB, by means of a resolution of itsgoverning committee, following commonly accepted methodologies. Thevaluation will take as its basis the economic-financial projections of theinstitution, with any modifications and adjustments that the FROB-appointed experts may consider appropriate. The valuation must take intoaccount the circumstances existing at the time that the instruments to be

used are applied and the need to preserve financial stability. Whendetermining the economic value of the institution, under no circumstanceswill any public financial support received or due from the FROB, or thatthe FROB may have paid as a result of any type of financial assistance to aninstitution, be taken into account.

The FROB will first request a report from the Banco de España on the abovevaluation procedure and criteria.

The subscription, acquisition or conversion price of the recapitalisationinstruments (that is, ordinary shares or contributions to share capital orinstruments convertible into ordinary shares or contributions to sharecapital) by the FROB will be set by applying to the economic value of theinstitution the discount applicable under the EU competition and state aidlegislation. The subscription, acquisition or conversion price will be setfollowing a report from the general audit office of the state administrationon observance of the relevant procedural rules.

The hybrid capital and subordinated debt instrument liability exercises willtake into account the market value of the debt securities to which they areaddressed, applying any premia or discounts in accordance with EU stateaid legislation. The institution will obtain at least one independent expertopinion to evidence the market value of the securities.

16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?Local rules are not stricter than CRD IV’s transitional standards.

About the authorYolanda Azanza specialises in all aspects of debt and equity capitalmarkets, representing both issuers and underwriters in cross-bordertransactions, including medium-term note programmes, regulatorycapital, covered bonds, hybrid instruments, convertible andexchangeable bonds, IPOs, secondary offerings and block trades.

Yolanda AzanzaPartner, Clifford Chance

Madrid, SpainT: +34915907500 E: [email protected]: www.cliffordchance.com

About the authorRoberto Grau deals with the tax aspects of capital markets transactions,including issuances of all kinds of debt and equity instruments. He alsospecialises in banking and lending transactions and the tax structuringof financial instruments, derivatives and securitisation structures.

Roberto GrauCounsel, Clifford Chance

Madrid, SpainT: +34915907500E: [email protected]: www.cliffordchance.com


1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?Switzerland fully implemented Basel III as of January 1 2013. However, notbeing a member of the EU, it will not implement CRD IV.

The Swiss Financial Market Supervisory Authority (FINMA) was and stillis responsible for issuing implementing regulations and, hence, also for theimplementation of Basel III.


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?The Capital Adequacy Ordinance that implements Basel III names asinstruments that qualify as CET1 the paid-in company capital, whichincludes nominal share capital, free reserves and retained earnings. UnderSwiss company law, in addition to common shares, it would be possible toissue participation securities that in our view could qualify as CET1;participation certificates are essentially a form of non-voting stock, withwhich, however, no preferential rights would be associated.

According to FINMA Circular 2013/1, however, a bank that claims two ormore different equity shares as CET1 of a bank, must demonstrate thatthese shares are treated equally regarding profit and loss sharing (also in thecase of a liquidation). Additionally, for banks and financial groups supervisedby FINMA that are organised as corporations and the common stock ofwhich is traded on a Swiss or foreign stock exchange (with supervision thatis equivalent to that of the Swiss stock exchange), only the common stock,and no other instrument, is eligible for CET1. Shares that do not qualify asCET1 of a bank must be allocated to additional tier 1 capital (AT1) or totier 2 capital, provided they meet the necessary requirements.

A bank’s CET1 is subject to deductions. For example, deferred tax assets,the realisation of which depends on the bank’s future profitability, must befully deducted from a bank’s CET1. However, netting with associateddeferred tax liabilities within the same geographical and factual taxationjurisdiction is permitted.

2.2 What instruments qualify as AT1 capital?In its implementation of Basel III, Switzerland followed very closely thewording in the Basel III documentation in relation to AT1 capital. Thismeans that essentially the following characteristics must be fulfilled:

(i) fully paid-in; (ii) perpetuity; (iii) first possibility to call the instrument at the option of the issuer noearlier than five years after issuance; (iv) notification of holders that the supervisory authority will approverepayment, repurchase or redemption only if the issuer will have sufficientcapital following that repayment, repurchase or redemption, or that the issuerwill replace the instruments with instruments of the same or better quality; (v) distributions are at the discretion of the issuer and may only be made ifsufficient distributable reserves are available; and, (vi) distributions must not increase over time in accordance with fluctua-tions in the issuer’s specific credit risk. In addition, AT1 instruments must

have a capital trigger at 5.125% CET1/RWA, meaning that if the ratio be-tween CET1 and risk-weighted assets falls below 5.125%, the instrumentmust be written off or converted into equity. Finally, AT1 instruments doneed to include a PONV-trigger.


3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation?Again, not being a member of the EU, Switzerland will not implement CRDIV, but rather, has implemented Basel III. Switzerland implemented BaselIII without any ’Swiss finish‘ for banks other than systemically relevantfinancial institutions (Sifis), thus providing for a basic capital requirementof 8% of which 4.5% must be met with CET1 and at least 6% with tier 1capital (CET1 or AT1; the remainder can be filled with tier 2), a capitalbuffer of 2.5 % to be filled with CET1, and an anti-cyclical buffer of up to2.5 % (currently, the Swiss government requires an anti-cyclical buffer of2%).

Additionally, FINMA may require banks to hold additional capital. FINMAmay exclude certain categories of banks from this obligation. This additionalcapital should specifically cover the risks that are not protected or that arenot sufficiently covered by the minimum required capital if applying arisk orientated approach (see also 12.1 below).

In addition to the rules that apply to all banks, the Swiss rules require thatSifis maintain a base capital of 4.5% of their RWA in the form of CET1.Sifis must also have a capital buffer of 8.5% of their RWA. Up to amaximum of 3% of that buffer may be in the form of convertible or write-down instruments that must meet the requirements for AT1 or tier 2instruments and provide for conversion or write-down when the ratio of itseligible CET1 to its RWA falls below 7% (so-called high triggerinstruments). At least 5.5% must be in the form of CET1. Together withthe base capital, therefore, Sifis must have a CET1 capital of at least 10%.Moreover, Sifis must meet a progressive component requirement that isdependent on their size (leverage ratio exposure) and their market share inthe bank’s domestic systemic relevant business, but which amounts to atleast 1%. The progressive component must be satisfied with convertible orwrite-down instruments that meet the requirements for AT1 or tier 2instruments and provide for conversion or write-down at 5% CET1/RWAat the latest (so-called low-trigger instruments). Alternatively, a Sifi may optto satisfy the progressive component requirement with CET1. Addedtogether, Sifis must have regulatory capital of up to 19% (assuming 6% inthe progressive component) or even more of their RWA of which at least10% must be in the form of CET1. Sifis must also fulfil particular capitaladequacy requirements relative to their total commitment, the so-calledleverage ratio (see section 9 below). Finally, as for all banks, the Swiss capitalrequirements for Sifis provide for a supplemental counter-cyclical buffer ofup to 2.5% of their RWA in the form of CET1 (which is currently set at2%).

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Switzerland

René Bösch and Benjamin Leisinger, Homburger

www.homburger.ch

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3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?The capital trigger for AT1 securities is set at a minimum ratio of 5.125%between CET1 and risk-weighted assets. This requirement is set forth inthe Capital Adequacy Ordinance.

3.3 How is the PONV defined in your jurisdiction?The Capital Adequacy Ordinance does not define the point of non-viability,or ‘PONV‘, but solely refers to the point of threatening insolvency.However, we believe that the PONV should refer to a situation wherecustomary measures to improve the capital adequacy are inadequate orunfeasible and, therefore, the conversion or write-down of debt instrumentsis an essential requirement to prevent an issuer from becoming insolvent,bankrupt, or unable to pay a material part of its debts or from ceasing tocarry on its business. In addition, the receipt of an irrevocable commitmentof extraordinary support from the public sector that has or will have theeffect of improving the bank’s capital adequacy (not liquidity) will alsoconstitute a PONV.

3.4 What are the grandfathering provisions and how are theyimplemented?The Capital Adequacy Ordinance introduces the grandfathering provisionsand phase-in provisions from Basel III.

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding?Neither Swiss legislation nor regulation provides formally for external stresstesting. Notwithstanding this, FINMA and the Swiss National Bank mayand regularly do require banks to perform stress tests, however, withoutthose tests becoming public or the authorities reporting or commentingpublically on them. There is no information available on any parameters ormethodologies applied in these tests.

4.2 Which national body is conducting the tests?FINMA, as the competent supervisor over banks, would be the competentbody, but the Swiss National Bank may also require tests, based on itsauthority to supervise the stability of the financial system (macro-prudentialsupervision) and to assure that banks retain sufficient liquidity and reserves.

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?Neither the category of banks that may become subject to stress tests northe criteria for inclusion have been made public.

5. Bank Supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all? Switzerland was a fast mover after the global financial crisis and has achievedan overhaul of its financial supervisory regime since then. It hasimplemented legislation to address the too-big-to-fail conundrum and otheraspects that ensued from the crisis. While there are plans to amend thebanking laws, those plans relate to a more formal overhaul of the BankingAct rather than a substantive one. The one important plan that exists is tosubject external asset managers to prudential supervision.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?Since Switzerland is not a member of the EU, this is not of relevance.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?Under Swiss income tax laws, interest payments under AT1s and tier 2contingent convertible securities (CoCos) and write-down securities are taxdeductible.

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?Generally, debt instruments issued by Swiss companies, including banks,are subject to Swiss withholding tax. However, the legislator introduced in2012 a temporary exemption for interest payments on AT1 and tier 2CoCos and write-down notes if they have been approved by FINMA. Thisexemption expires on December 31 2016, and was intended to be replacedby a different system (see below, 6.3). Instruments issued before that date,however, will be grandfathered.

6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and tier 2 securities in yourjurisdiction? The exemption from the Swiss withholding tax for AT1 and tier 2 CoCosand write-down notes is only temporary, lasting only until the end of 2016if not re-enacted or adopted for an indefinite period. However, aside fromthat, there are general initiatives to abolish the Swiss withholding tax regime,probably replacing it with a paying agency deduction system.

6.4 What is the tax treatment in terms of the capital gains on a writedown or conversion?Capital gains in the case of write-down or conversion of the AT1 or tier 2securities would generally qualify as taxable income. As a matter of practice,issuers obtain respective rulings from the tax authorities.


7.1 What type of loss absorbency features are/ will be required forAT1 and for tier 2 securities in your jurisdiction and what is therelevant legislation/regulation?For debt instruments to qualify as AT1 instruments, they must provide fora capital trigger at 5.125%, falling below which the instrument must eitherbe fully written-off or must be converted into CET1 equity securities, forexample, shares. In addition, a PONV-trigger must be included, againrequiring the write-off or the conversion into CET1 equity securities. Fortier 2 securities that do not qualify as conversion capital under Swiss capitalrules for Sifis (that is, that do not have a capital ratio-related trigger at 5%(low-trigger) or 7% (high-trigger) CET1/RWA at the latest), merely aPONV-trigger is required.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?Yes. In order to qualify as regulatory capital instruments, all instrumentsmust be loss absorbing, that is, they must at least provide for a PONV-trigger.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?In addition to the issuer’s discretion to pay a coupon, an issuer must havesufficient distributable profits or freely available reserves to pay a coupon.Whether or not an issuer has such distributable profits or freely availablereserves must be determined by reference to Swiss company law.

8.2 How are MDAs calculated, and what happens in case of abreach?In Swiss law, there is no banking-related mechanism or formula to calculatethe maximum distributable amounts (MDA) in certain situations. Rather,Swiss company law only refers to distributable profits and freely available

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reserves. This amount must be calculated for a relevant bank by reference toSwiss company law set forth in the Swiss Code of Obligations and the SwissCode of Obligations’ accounting rules. However, if an institution’s capital fallsbelow the target level as individually defined by FINMA on a non-publicbasis, FINMA may order it to reduce or refrain entirely from dividendpayments, share buybacks and discretionary remuneration components or tocarry out a capital increase. The banks are subject to regular reporting dutiesas to their capital adequacy and, in the case of a breach of the minimumrequirements, must immediately inform FINMA and its auditor. However,these breaches are normally not made public, neither by the bank nor byFINMA, unless FINMA orders draconian measures.

In the Regulatory Consistency Assessment Programme (RCAP), assessmentof Basel III regulations – Switzerland of June 2013, the regulation inSwitzerland on the distribution constraints was held to be ’partiallycompliant‘, but the lack of full compliance labelled as ’not material’.

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?Switzerland implemented a leverage ratio for Sifis as of January 1 2013.Swiss systemically relevant banks must fulfil particular capital adequacyrequirements relative to their total commitment. This leverage ratiorequirement is determined by reference to capital requirements and is,therefore, indirectly subject to phase-in arrangements. The target ratio is4.56% (assuming a total capital requirement of 19%, that is, with no capitalrelief in the progressive capital component).

However, the introduction of a leverage ratio has been proposed inaccordance with Basel III also for all other banks. FINMA may oblige banksto report their Basel III leverage ratio to them during an observation period,and FINMA collects the data to calculate the leverage ratio on a stand-aloneand consolidated basis. The intention is for banks and securities dealers todisclose the leverage ratio from 2015 on. It is not yet clear whetherSwitzerland will follow the timetable indicated in Basel III or whether it willactually move faster than is required by Basel III.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?Under the prevailing rules applicable for Sifis, AT1 instruments may counttowards an Sifi’s leverage ratio, and even tier 2 instruments, if theyconstituted conversion capital (CoCos or write-down notes) within themeaning of the provisions in the Capital Adequacy Ordinance in relationto Sifis and were either part of the buffer capital or the progressivecomponent. The proposed leverage ratio for all banks would allow countingAT1 towards the leverage ratio.

10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements?Switzerland has addressed the question of how cooperatives can and haveto comply with regulatory requirements (they also did so for cantonal banksand private banks not being organised as corporations), but they have notextended this guidance to other mutuals.

10.2 Have additional rules and regulations been issued in relationto Sifis?Yes, in early 2012 Switzerland adopted a too-big-to-fail legislation that imposesadditional requirements on Sifis in relation to capital, liquidity, large exposuresand emergency planning. These additional requirements came into effect onJanuary 1 2013. In Switzerland, UBS, Credit Suisse, Zürcher Kantonalbankand Raiffeisen have been identified by the Swiss National Bank as systemicallyrelevant. UBS and Credit Suisse qualify as global systemically important banksaccording to the Financial Stability Board.


11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?Under Swiss banking laws, FINMA as the prudential regulator over bankshas the power to intervene and order protective measures in the case of athreatening insolvency or liquidity shortage, or if the institution does notfulfil the capital requirements after having been so reprimanded. Protectivemeasures may include the giving of directions to the bank’s governingbodies, appointing a special agent for the bank, discharging members of thesenior management or the boards, ordering a halt on payments by the bankor putting the bank either into restructuring or liquidation proceedings.However, by operation of law, FINMA does not have any nationalisationpowers.

There are no recent examples where FINMA had to intervene and makeuse of its broad powers.

12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?In 2011 FINMA issued a circular addressing pillar 2 requirements for banks.Under that circular, banks will fall into one of five categories, in accordancewith their size in terms of balance sheet, assets under management,privileged deposits and required capital under pillar 1. For each of thesecategories, a target capital ratio is determined, ranging from 10.5% for smallbanks (as opposed to a minimum of 8% provided for by the CapitalAdequacy Ordinance) to 14.4 % (9.2% CET1; 2.2% AT1; 3.0% tier 2) forlarge banks that do not qualify as Sifis. The circular also defines interventionlevels at which FINMA may intervene with the bank. Large banks qualifyingas Sifis are not subject to this circular as they have to hold a higher share ofrisk-bearing capital over and above the minimum requirements under pillars1 and 2. The RCAP, assessing compliance with the Basel III framework forSwitzerland in June 2013, graded Switzerland as compliant with the pillar2 supervisory review process. The assessment stated that Switzerlandimplemented all four key principles of pillar 2 in close alignment with theBasel III standards.

12.2 If so, what are the disclosure requirements around pillar 2, ifany? FINMA requires that the methodologies used for calculating capitaladequacy requirements be specified in the qualitative information disclosed,if material at the time of the annual accounts. The additional disclosureobligations required by Basel III are explicitly referred to as well. Compliancewith those disclosure obligations is subject to the annual verification of theexternal auditors.

There are no special requirements in place providing for a bank’s duty todisclose specific information, for example, the size of their buffers, in roadshows or transaction or disclosure documents.

Large banks meeting certain requirements must also quarterly publish theirCET1, tier 1 (CET1 and AT1) and ordinary regulatory capital ratios (tier1 and tier 2) of the group and the most important bank subsidiaries andsubgroups in Switzerland and abroad that have to comply with capitalrequirements and the minimum required capital.

Additionally, Sifis must quarterly report their ratios regarding CET1 andhigh- and low-trigger conversion capital. For the conversion capital, Sifisare required to disclose which of their conversion capital instruments havean AT1 and which have a tier 2 host instrument.

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13.1 Are there any local provisions that could trigger earlyredemption?No. There are no such local provisions. Generally, in line with Basel III,regulatory capital instruments qualifying as AT1 or tier 2 may be redeemedor repurchased in the case of the occurrence of a tax event or regulatoryevent. That redemption or repurchase is, however, still subject to FINMAapproval.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?Minimum standards that should be met before capital relief will be grantedin respect of any form of collateral are not explicitly stated in the CapitalAdequacy Ordinance. However, FINMA has formulated certain minimumrequirements in its FINMA Circular 2008/23 ‘Risk Diversification – Banks’,in order for the credit derivative to be recognised. For instance, the creditrisk must actually be transferred to the protection provider, and certainminimum criteria must be met.


15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?Because Switzerland is not a member of the EU, the BRRD will not beimplemented. However, Switzerland has overhauled its bankruptcy andliquidation laws applicable to banks, providing for a modern resolutionframework based on the principles or guidelines of the Financial StabilityBoard. The relevant rules are set forth in the Swiss Banking Act and theOrdinance of FINMA on the Insolvency of Banks and Securities Dealers(BIO-FINMA). In restructuring proceedings, FINMA has a variety of tools,including bail-in and the transfer of assets, to try to successfully restructurethe bank. FINMA will initiate liquidation proceedings if a restructuringappears unlikely to succeed or has already failed. In this event, FINMArevokes the bank’s banking licence, orders its liquidation, publicly announcesthe opening of liquidation proceedings and appoints a liquidator.

There are no requirements to hold eligible liabilities for bail-in, yet.Switzerland is awaiting guidance from international bodies in this respect.

15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?No. No such indication has yet been given.

16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?Generally, the Swiss legal framework for Sifis seems to be stricter than thegeneral requirements under CRD IV.

About the authorRené Bösch heads the financial services practice team. He advises onbanking law and financial services regulation and specialises in offeringsof debt and equity-linked securities, regulatory capital instruments forbanks, as well as hybrid financial instruments.

René BöschPartner, Homburger

Zurich, SwitzerlandT: +41 43 222 15 40E: [email protected]: www.homburger.ch

About the authorBenjamin Leisinger’s practice focuses on banking, finance and capitalmarkets law. His areas of expertise also include corporate andcommercial law.

Benjamin LeisingerAssociate, Homburger

Zurich, SwitzerlandT: +41 43 222 12 96E: [email protected]: www.homburger.ch


1.1 Who are the relevant supervising authorities that governfinancial institutions in the context of national Basel III/ CRD IVimplementation and what is their remit?The Prudential Regulation Authority (PRA) is responsible for theimplementation of CRD IV for UK credit institutions, as well as for certaininvestment firms.

The Financial Conduct Authority (FCA) is responsible for CRD IVimplementation by the investment firms which it supervises.

HM Treasury is responsible for designating which authority will be in chargeof the application of the capital buffers for systemically important firms,and will also be responsible for transposing the CRD IV provisions on firms’disclosure requirements.


2.1 Are instruments other than common shares eligible to qualify asCET1 for banks and mutuals?In the case of banks, ordinary shares are the instruments that are treated aseligible for inclusion as CET1 capital under article 28 of the CRR.

In the case of non-bank credit institutions, such as building societies, theprovisions of article 28 of the CRR, with modifications resulting from theapplication of article 29 of the CRR, are relevant.

In the UK, building societies have issued Core Capital Deferred Shares(CCDS), which in a CRD IV context are eligible to be treated as CET1capital, although the rights attaching to them, particularly as regards votingrights and rights to distributions, are dissimilar to the corresponding rightsattaching to ordinary shares issued by banks.

2.2 What instruments qualify as AT1 capital?The criteria applicable to AT1 capital are set out in articles 52 to 54 of theCRR.

These criteria require, among other things, that: • AT1 instruments should be fully paid up, undated and deeply

subordinated instruments whose provisions must not provide for anyincentive on the part of the issuer to redeem them;

• the AT1 instruments (save in very limited circumstances) must not beredeemed before their fifth anniversary by the issuer;

• AT1 distributions must be entirely discretionary; and, • the AT1 instrument must also provide for a principal loss absorption

mechanism, whether by means of equity conversion, permanent write-down or temporary write-down, upon the occurrence of a trigger eventwhich occurs when the CET1 capital ratio of the institution falls below5.125% or a level that is higher than 5.125% where determined by theinstitution and specified in the provisions governing the AT1instruments.

In the UK, the PRA in its policy statement (PS7/13) of December 2013indicated a preference for principal loss absorption by means of equityconversion or permanent write-down, instead of temporary write-down, aswell as a preference for a higher CET1 trigger for principal loss absorption(see 3.2 below).

2.3 Do deferred tax assets count towards a bank’s core capital? Iftransitional rules apply, what are those?In contrast to the situation in Spain and Italy, there is nothing in the UKthat would give (via the tax code) any sort of state back-stopping of thevalue of tax losses so as to improve their regulatory capital treatment. TheUK position follows what is provided for under CRR 1/CRD IV, which isthat deferred tax assets that rely on future profitability should be deductedin accordance with the provisions of CRR articles 36 to 38, and that thesedeductions are applied in full with effect from January 1 2014 instead ofbeing subject to the transitional provisions as set out in CRR article 478.


3.1 How does your jurisdiction implement combined bufferrequirements laid out in CRD IV and what is the relevant legislation/regulation?The final rules and accompanying supervisory statement to implement thecapital buffers requirements under CRD IV are set out in a policy statementof the PRA (PS3/14) that was published in April 2014.

The CRD IV buffer requirements are implemented in the UK by theCapital Buffers Instrument 2014, which was made by the PRA under theprovisions of sections 137G and 137T of the Financial Services and MarketsAct 2000 (FSMA).

3.2 What capital triggers are expected/ are in place for AT1securities in your jurisdiction and what is the relevant legislation/regulation?In its Policy Statement (PS7/13) of December 2013, the PRA indicated apreference for a higher CET1 trigger than the CRD IV minimum of5.125%, on the basis that such a low trigger might not allow the AT1security to be converted into equity or, where appropriate, be written-downin time to prevent the failure of the firm. While there has not been anydefinitive statement from the PRA as to what an appropriate trigger levelwill be, all UK banks that have issued AT1 securities so far have used atrigger level of 7% rather than the CRD IV minimum requirement of5.125%.

3.3 How is the PONV defined in your jurisdiction?In the UK, the point of non-viability (PONV) is determined in accordancewith the provisions of the Bank Recovery and Resolution Directive (BRRD),as being the point at which the relevant authority determines that theinstitution meets the conditions for resolution or the point at which theauthority decides that the institution would cease to be viable if additionaltier 1 and tier 2 capital instruments were not written down or converted(c.f. recital 81 of the BRRD). The conditions for resolution are set out inarticle 32 of the BRRD. These provisions have been partially reflected inEnglish law through amendments made by the UK Financial Services(Banking Reform) Act 2013 to the Banking Act 2009 (e.g. section 7) withsecondary legislation to effect full transposition of the BRRD expected tocome into force by the end of 2014.

3.4 What are the grandfathering provisions and how are theyimplemented?The relevant grandfathering provisions for existing capital instruments areset out in article 486 of the CRR. A gradual reduction in capital treatmentis provided for between 2014 and 2021 for grandfathered instruments with

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United Kingdom

Alan Newton and Chen-Lum Hong, Freshfields Bruckhaus Deringer

www.freshfields.com

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a range of applicable percentages within which each member state’scompetent authority may determine its own applicable percentage for eachof the eight years from and including 2014 to and including 2021, rangingfrom 60% to 80% in 2014 to 0% to 10% in 2021.

The PRA has adopted the highest applicable percentage for each year forthe purposes of grandfathering treatment (see PRA Rulebook, annex C,Definition of Capital). The FCA has adopted the same approach. For limitson grandfathering, see FCA IFSPRU Prudential Sourcebook for InvestmentFirms, TP5 (Transitional Provisions [Own Funds]).

3.5 Are certain types of banks, e.g. retails banks, or certain types ofactivities, ring-fenced? When the relevant provisions of the UK Financial Services (BankingReform) Act 2013 are brought into force they will in effect require certainactivities to be conducted by certain types of bank. In particular, the BankingReform Act will require core activities (as defined in the act and secondarylegislation to be made under it), being primarily the acceptance of retailclient deposits (individuals and small businesses), to be ring-fenced fromother, essentially wholesale, activities. This will require banking groups tohave separate entities to carry out their respective retail and wholesaleactivities. The Banking Reform Act will also establish detailed ring-fencingrules, for instance, prohibiting the ring-fenced bank from conducting certainactivities, entering into transactions with certain kinds of persons, assumingcertain kinds of risk, and so on. The rules will also require the ring-fencedbank to ensure that it makes arrangements for the effective provision to itof the services and facilities it requires to enable it to carry out its coreactivity of retail deposit taking and to ensure that it will not be adverselyaffected by the activities of other members of the group to which it belongs.

4. Stress testing

4.1 What is the status of your jurisdiction’s treatment of stresstests? Have plans for upcoming tests been announced, and/ or areresults of previous stress tests outstanding?The UK Financial Policy Committee recommended in March 2013 thatthe Bank of England and the PRA should develop proposals for regular stresstesting of the UK banking system to assess the system’s capital adequacy. InOctober 2013 the Bank of England published a discussion paper setting outthe main features of the proposed stress testing framework over the mediumterm. Following the announcement by the EBA in January 2014 of plansfor an EU-wide stress test to be conducted in 2014, in April 2014 the Bankof England announced that it would conduct a variant of the EU-wide stresstest in 2014 complementing the EU-wide exercise. The UK variant test willexplore particular UK macroeconomic vulnerabilities facing the UK bankingsystem. The results of the UK variant stress test will be published onDecember 16 2014.

4.2 Which national body is conducting the tests?The Bank of England and the PRA.

4.3 Which banks are subject to stress tests and what are the criteriafor inclusion?The UK variant of the EU-wide stress test covers the eight major UK banksand building societies: Barclays, Co-operative Bank, HSBC, Lloyds BankingGroup, Nationwide, Royal Bank of Scotland, Santander UK and StandardChartered.

4.4 How does the AQR feed into your jurisdiction’s stress tests(where relevant?)The UK variant test will extend the EU-wide stress test in a number of areas.These include:a) assessing the impact of a variant of the EU-wide stress scenario, focusedon explaining vulnerabilities stemming from the UK household sector inparticular;b) using a dynamic balance sheet definition, that is, allowing the size andcomposition of banks’ balance sheets to vary over the projection period;

c) using a suite of models to assess the impact of scenarios on firms’ profitsand capital ratios, including both the firms’ own models as well as modelsrun by the Bank of England/PRA; and,d) using a definition of capital that is consistent with the PRA’s capitalregime and correspondingly a different hurdle rate framework to assess theneed for supervisory and system-wide actions by the PRA and FinancialPolicy Committee (including 4.5% of RWA to be met with CET1 capitalin a stress scenario and 7% of RWAs to be met with CET1 capital and a3% leverage ratio using a tier 1 definition of capital in the baseline scenario).This could include making adjustments to sectorial level capitalrequirements and requiring a system-wide counter-cyclical capital buffer toput firms into a better position to understand stress.

4.5 Are any supplementary banks (where relevant) being selectedfor EBA testing too?Not relevant.

4.6 Are stress test based on financials reported at key dates (e.g.end of year), and how are subsequent changes (e.g. capitalincreases) taken into account? The Bank of England/PRA stress test will cover a three-year time horizon.Where firms have a year ending December 31, the reference date for thestress will be December 31 2013 and for each subsequent year firms areexpected to provide projections as at December 31 and to provide results atthe highest level of UK consolidation. Firms that operate with a differentfinancial year can apply to make alternative arrangements in relation toreference dates. The EU-wide stress test was carried out on the basis of theconsolidated 2013 figures and the scenarios were applied over a period ofthree years (from 2014 to 2016).

A key difference is that the Bank of England/PRA stress test is a variant ofthe EU-wide test and is to be performed on a dynamic balance sheet, withthe exception of assets subject to market risk. This means that projectionsof profits and capital ratios will take into account changes in the size andcomposition of the balance sheet, both in the baseline and in the stressscenario, and consequently projections of capital ratios under the baselinescenario are also likely to differ. Only for trading book assets, structuredfinance assets and available-for-sale portfolios are firms expected to use theEBA static balance sheet methodology being used in the EU-wide stress test.

5. Bank Supervision

5.1 How will your jurisdiction’s supervisory authority change in thenext 12 months, if at all? The supervisory authorities in the UK are not expected to change in thenext 12 months.

5.2 How will the JST (joint supervisory teams comprising nationaland ECB teams) work in practice?Since the UK is not part of the SRM it is not subject to joint supervisionby the ECB. The Bank of England and PRA continue as the principalprudential supervisor, with the FCA continuing to have responsibility forthe supervision of some investment firms and for conduct of business rules.

5.3 How will they impact the implementation of revised capital plansfollowing stress tests?Joint supervision involving the ECB will not be relevant to UK banks.

6. Tax treatment

6.1 Are AT1s and/ or tier 2 CoCos tax deductible?Yes, in accordance with the legislation referred to in 6.3 below.

6.2 Are coupon payments from AT1 and/ or tier 2 CoCos subjectedto withholding tax?These payments are free of withholding tax in accordance with thelegislation referred to in 6.3 below.

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6.3 To what extent have local rules been changed or are expected tochange to enhance tax efficiency of AT1 and T2 securities in yourjurisdiction? The Taxation of Regulatory Capital Securities Regulations 2013 came intoforce on January 1 2014, and apply to all CRD IV-compliant securitiesissued by UK credit institutions and investment firms.

6.4 What is the treatment in terms of the capital gains on a writedown or conversion? Under the Taxation of Capital Securities Regulations 2013, a write-downor equity conversion and, in the case of a temporary write-down, anysubsequent write-up of the capital security, is treated as being neutral froma UK capital gains tax perspective. Regulation 3(2) of the Taxation of CapitalSecurities Regulations 2013 states that no credit or debit is to be broughtinto account under part 5 of the Corporation Taxes Act 2009 in respect ofthe principal amount of the security being written-down on a permanentor temporary basis or the security being converted to a CET1 instrumentin accordance with any regulatory requirements of the provisions governingthe security, or in respect of the principal amount of the security beingwritten-up, following a write-down of the principal amount on a temporarybasis, in accordance with any regulatory requirements or the provisionsgoverning the security.


7.1 What type of loss absorbency features are/ will be required forAT1 and for T2 securities in your jurisdiction and what is therelevant legislation/regulation?T2 securities must provide for loss absorption in an insolvency by way ofsubordination to senior unsecured debt, and will also be subject to beingbailed-in on a statutory basis in accordance with the BRRD. T2 securitiesare not required to provide for going concern loss absorption (for example,coupon cancellation), nor are they required to provide principal lossabsorption by way of equity conversion or write-down upon the occurrenceof a pre-determined trigger event. See article 63 of the CRR.

AT1 securities must provide for loss absorption in an insolvency by way ofsubordination to T2 securities, and will also be subject to being bailed-inon a statutory basis under the BRRD. AT1 securities are required to havefully discretionary coupons in order to provide loss absorption on a goingconcern basis and are also required to provide for principal loss absorptionby means of equity conversion, temporary write-down or permanent write-down.

In its policy statement PS7/13 published in December 2013, the PRAsuggested that it preferred either permanent write-down or equityconversion as the means for effecting principal loss absorption upon breachof a CET1 trigger, as opposed to temporary write-down, even though itrecognised that all three possibilities were provided for under CRD IV. Seearticles 52-54 of the CRR and PRA policy statement PS7/13.

7.2 Must all regulatory capital instruments – including tier 2 – beloss absorbing?Yes, although to varying degrees, as described in 7.1.

8. Coupon payment

8.1 Are there any additional local rules that would affect an issuer’sability or its discretion to pay a coupon?From the standpoint of UK company legislation, the ability of an issuer topay the discretionary coupon on AT1 securities will depend upon theavailability of distributable profits within the meaning of section 830 of theCompanies Act 2006.

Coupons on T2 securities are mandatorily payable, rather than discretionary.

8.2 How are MDAs calculated, and what happens in case of abreach?Under the PRA’s capital buffer rules, a firm that does not meet the combinedbuffer must: (a) calculate the maximum distributable amount (MDA) inaccordance with the provisions set out below; and (b) report the MDA tothe PRA in writing no later than five working days after the firm identifiedthat it did not meet the combined buffer.

A firm must calculate the MDA in accordance with the methodology setout in detail in chapter 4 of the capital buffers rules of the PRA Rulebook.In essence, this calculates the MDA by reference to the firm’s distributableprofits multiplied by a factor (ranging between zero and 0.6) depending onhow far the firm in question has fallen short of its combined bufferrequirement.

These requirements are in line with the provisions of articles 141 and 142of the CRD IV, which set out the requirements relating to restrictions ondistributions and capital conservation plans respectively.

9. Leverage ratio

9.1 Is it expected that the leverage ratio will be implemented soonerthan Basel III/ CRD IV requires? What are the relevant ratios anddates?

Following the publication of the Financial Policy Committee’s “Review ofthe Leverage Ratio” in October 2014, a minimum leverage ratiorequirement of 3% is to be introduced as soon as practicable for UK G-SIBs and other major UK banks and building societies at the level of theconsolidated group. This 3% minimum leverage ratio requirement isexpected to apply to all other PRA regulated banks, building societies andinvestment firms from 2018 onwards.

UK G-SIBs and other major domestic banks and building societies willalso be subject to a supplementary leverage ratio buffer which will be setat 35% of the corresponding risk-weighted systemic buffer rate for thesefirms. This supplementary leverage ratio buffer will be implemented inparallel with the corresponding risk-weighted systemic risk buffers, andthus will be phased in from 2016 for G-SIBs and introduced in 2019 forother major domestic UK banks and building societies.

Furthermore, all PRA regulated banks, building societies and investmentfirms will be subject to a countercyclical leverage ratio buffer which willbe set at 35% of the risk-weighted countercyclical capital buffer rate. Thecountercyclical leverage ratio buffer requirement is to be introduced assoon as practicable for UK G-SIBs and other major domestic UK banksand building societies, and is expected to apply to all other PRA regulatedbanks, building societies and investment firms from 2018 onwards.

9.2 What is your jurisdiction’s position on whether AT1’s can counttowards financial institutions’ leverage ratio?AT1 securities are permitted to comprise up to 25% of the capital resourcesmeasure (i.e. the numerator of the leverage ratio) for the purposes of meetingthe 3% minimum leverage ratio requirement. However, buffer capitalrequirements can be met with CET1 capital only.

10. Mutuals/ Sifis

10.1 Have local authorities specified how mutuals can comply withregulatory requirements?Concerns have been raised by building societies that the application of theleverage ratio is unduly onerous for them in view of the relatively low riskof their assets (being predominantly mortgage loans) compared to mostother financial institutions. However, at present, building societies remainsubject to the same leverage ratio requirements as banks.

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10.2 Have additional rules and regulations been issued in relationto Sifis?The PRA policy statement on capital buffers in April 2014 confirmed thatthe PRA will be responsible for identifying G-SIIs and for setting the G-SIIbuffer. The EBA will submit draft regulatory technical standards to theEuropean Commission on the methodology through which the PRA willidentify G-SIIs. The Financial Policy Committee’s leverage ratio review alsosets out further proposals in relation to global systemically important banksand ring-fenced banks, and proposes higher leverage ratio requirements forthose.

So far, the PRA in its capacity as the UK authority that is responsible fordesignating Sifis for the purposes of CRD IV article 131, subject to theidentification methodology specified in regulatory technical standardsprepared by the EBA, has yet to make any announcement in this regard. Inthe absence of any such designations by the PRA, the government hasindicated that for the purposes of the combined buffer capital requirement,GSIIs should be those which have been identified by the Financial StabilityBoard as being global systemically important banks (G-SIBs). The FinancialStability Board designated five UK banks as G-SIBs in 2011: Barclays, RBS,Lloyds Banking Group, Standard Chartered and HSBC. The most recentlist of institutions that are considered to be G-SIBs can be found athttp://www.financialstabilityboard.org/publications/r_121031ac.pdf


11.1 What, if any, examples are there of regulatory intervention (e.g.cases of nationalisation or restructuring) of failing institutions?During the financial crisis there were a number of cases of regulatoryintervention in the UK. These commenced in September 2007 whenNorthern Rock received emergency standby liquidity support from the Bankof England. Northern Rock was taken into temporary public ownership inFebruary 2008 using powers conferred by the Banking (Special Provisions)Act 2008 (BSPA), which was enacted specifically for the purpose of resolvingfailing banks, and subsequently restructured by being split into two separateentities with the ’good bank‘ being sold to Virgin Money. Bradford andBingley was taken into public ownership using the BSPA and its depositbook sold in September 2008, and Dunfermline Building Society was putinto resolution in March 2009 using the powers conferred by the newly-enacted Banking Act 2009. The UK government provided aid to Royal Bankof Scotland and Lloyds Banking Group and holds approximately 80% and25% respectively of the issued share capital of these entities, with thoseshareholdings managed through UK Asset Resolution. Both of these groupsare in the process of being restructured. The collapse of the Icelandic banks,Landsbanki and Kaupthing, in October 2008 also resulted in interventionby the authorities in the UK to protect UK depositors. In relation toLandsbanki, this included the UK Financial Services Authority using thepowers in the BSPA to transfer the deposits of its subsidiary, Heritable Bank,to ING and then putting Heritable into administration and the UKgovernment freezing the assets of Landsbanki in the UK. In relation toKaupthing Singer & Friedlander, the UK subsidiary of Kaupting Bank,again the BSPA was used to transfer Kaupthing’s retail deposits to ING andto place the rest of the business into administration.

12. Disclosure

12.1 Does local regulation specify pillar 2 requirements, and whatare those?Pillar 2A capital is set for each firm on the basis of guidance given by thePRA on the level of capital that it believes such a firm should hold, byreference to the circumstances of the firm and also to allow the PRA to retainflexibility in setting appropriate capital standards in times of stress. Pillar2A capital is positioned below the combined capital buffer but above thepillar 1 minimum capital requirement. The PRA will expect firms to meetthe pillar 2A requirement with at least 56% in CET1, not more than 44%in AT1 and a maximum of 25% in T2 by January 1 2015.

Pillar 2B capital is to be replaced by a firm-specific PRA buffer. The PRAbuffer will only require a firm to hold additional capital if and to the extentthat it exceeds the sum of the firm’s combined buffer requirement.

The overall situation in the UK relating to pillar 2A capital and the newPRA buffer is expected to become clearer once the PRA’s pillar 2 frameworkconsultation is completed, which is expected to occur before the end of2014.

12.2 What, when, and how are banks required to disclosebuffer/trigger information and what are the consequences forcoupon payments if they disclose a breach? Restrictions on AT1 distributions (whether resulting from the exercise bythe issuer of its unfettered discretion not to pay a distribution or from theimposition of restrictions on distributions due to the issuer being in breachof its combined buffer) or a breach of an AT1 securities’ CET1 trigger whichresults in principal loss absorption by way of the write-down or equityconversion of the AT1 securities, would be likely to require disclosure underthe continuing obligation requirements of the listing authority on whichthe relevant AT1 securities were admitted to list and trade. This would beon the basis that such a restriction on distributions or, as the case may be,principal loss absorption by means of write-down or equity conversionwould, among other things, (i) be likely to constitute price-sensitiveinformation for the AT1 security holders, and, (ii) be likely to requiredisclosure at the level of the listing authority on which the Issuer’s equitysecurities were admitted to list and trade, if that information were to beviewed as being price-sensitive in relation to the issuer’s equity securities aswell.

In addition, any notification requirements set out in the terms andconditions of the AT1 securities will also need to be taken into account.


13.1 Article 78 of the CRR specifies a number of reasons for earlyredemption, including changes in the regulatory classification andapplicable tax treatment. Does local regulation elaborate on this, oradd any other provisions that would allow for early redemption?There are no specific UK rules, and the UK’s position in this respect is inaccordance with the provisions of article 78(4) of the CRR.

14. CDS contracts

14.1 Do local rules specify the use of credit default swaps or othertools to hedge against default or other credit events in order tolower regulatory capital requirements?There are no specific UK rules, and the UK’s position in this respect is inaccordance with the provisions of article 204 of the CRR.


15.1 Has the BRRD been implemented in your jurisdiction and how?If not, what plans for implementation have been made?The UK has already included bail-in powers in UK legislation throughamendments to the Banking Act 2009 made by the Financial Services(Banking Reform) Act 2013, although these have not been brought into force.With the BRRD being adopted, it is proposed these will be amended andbrought into line with the BRRD. HM Treasury, the PRA and the FCA haveall published detailed consultation papers describing the way in which theBRRD will be transposed into law in the UK with effect from January 1 2015.These are: HM Treasury’s Transposition of the Bank Recovery and ResolutionDirective July 2014, the PRA Consultation Paper CP 13/14 Implementingthe Bank Recovery and Resolution Directive, and FCA Consultation PaperCP 14/15 Recovery and Resolution Directive. This transposition will beeffected by a combination of amendment to existing statute – primarily theBanking Act 2009 – and by changes to the rules made by the PRA and theFCA in their respective rulebooks and supervisory statements.

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15.2 Have authorities specified how they value a bank and itsassets at PONV so as to determine the value attributed to differentcreditor classes?This has not been specified in these terms. However, it is likely that atPONV a firm would have failed to satisfy or is likely to fail to satisfy thethreshold conditions for authorisation under FSMA 2000. One of thethreshold conditions (paragraph 4 of schedule 6 FSMA) is that the resourcesof the firm must, in the opinion of the PRA, be adequate in relation to theregulated activities that it carries on. This would involve an assessment ofasset values and also of liabilities and of capital adequacy under theapplicable CRR rules as implemented in the UK and the ability to managerisk in connection with the business. The proposed Banking Act 2009(Recovery and Resolution Directive) (Amendment) Order to be made toimplement the BRRD in the UK includes provisions relating to therequirements to be met when exercising the bail-in option. These includethe order in which categories of liabilities – CET1, AT1, subordinated debtthat is not AT1 or tier 2 capital and other eligible liabilities – are to becancelled or reduced to cover the shortfall amount calculated by the Bankof England under article 46 of the BRRD. The shortfall amount must bedetermined on the basis of a valuation which complies with article 36BRRD. Article 36 requires a ’fair, prudent and realistic valuation of theassets and liabilities of the institution‘ to be carried out by a personindependent from any public authority, although the resolution authoritymay carry out a provisional valuation when this is not possible at the timeof resolution due to time constraints. It is also to be noted that inconjunction with the introduction of the bail-in tool, the UK Treasury willbe making the Banking Act 2009 (Mandatory Compensation ArrangementsFollowing Bail-in) regulations. Under these provisions, when enacted, acompensation order may be necessary in certain circumstances where a bail-in provision has been made. Such an order would require the appointmentof an independent valuer to determine whether any compensation was

payable to holders of liabilities which had been bailed-in. The valuationprinciples required to be taken into account by the valuer must be based onthe counter-factual position assuming that the relevant institution hasentered into insolvency immediately before the bail-in, that bail-in wouldnot have occurred and no other resolution option would have been exercisedand that no financial assistance would have been provided to the institution.The independent valuer must then assess the treatment that the relevantpersons to whom the bail-in liabilities were owed would have received(having regard to their position in the creditor hierarchy on insolvency) ifthe institution had entered into insolvency immediately before the initialresolution instrument had come into effect.

16. General

16.1 Other than the above, have local laws or regulations imposedstricter structures than CRD IV’s transitional standards, and if so, inwhat areas?Since 2013 the PRA has required both CET1 calculations and leverage ratiocalculations to be done on a ’fully loaded‘ basis rather than allowing firmsto rely on the transitional provisions set out in part 10 of the CRR.

About the authorAlan is a finance partner experienced in a wide range of transactions,including DCM, structured debt, regulatory capital, securitisations andrelated regulatory work. Recently, he has focused on bank restructuringand related regulatory work. He was lead partner for Northern Rockthroughout its difficulties, including its good bank/bad bankrestructuring and the subsequent sale of the good bank. He advisedsome of the Irish banks on potential restructurings. He was also a keymember of the Bank of England team during the crisis, advising onaspects of the resolutions of Bradford and Bingley, the Icelandic banksand the Dunfermline Building Society. He has advised banks on theirrecovery and resolution plans and the related regulatory submissions,including the bail-in stabilisation tool and its potential application.

Alan NewtonPartner, Freshfields Bruckhaus Deringer

London, United KingdomT: +44 20 7832 7685E: [email protected] W: www.freshfields.com

About the authorChen-Lum Hong is an English qualified solicitor based in the Londonoffice of Freshfields and advises on international securities offerings. Hehas extensive experience in the field of regulatory capital raising forbanks and other financial institutions, and has also been involved inadvising on issues relating to developments in bank structural reform,including bank recovery and resolution and bail-in.

Chen-Lum HongSenior Associate, Freshfields BruckhausDeringer

London, United KingdomT: +44 20 7427 3715E: [email protected]: www.freshfields.com

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