Title II – Guidelines concerning the treatment applicable to instruments provided for in Regulation (EU) No 575/2013 and in Directive 2013/36/EU for the purposes of the sequence of writedown and conversion

These guidelines set out below relates only to the interrelationship between Regulation (EU) No 575/2013 and Directive 2013/36/EU with Directive 2014/59/EU with regard to the sequence of writedown and conversion in case of application of the bail-in tool or the PONV conversion power. They do not address any other interrelationship of Directive 2014/59/EU with Regulation (EU) No 575/2013 and Directive 2013/36/EU.

They serve to clarify how resolution authorities should take into account the contractual features of instruments issued by the entity subject to use of the bail-in or PONV power which qualify as additional T1 or T2 instruments according to the framework laid down in Regulation (EU) No 575/2013 and Directive 2013/36/EU when determining the order of the writedown or conversion. In some cases the latter framework recognises instruments as capital instruments, but due to particular contractual features they are fully or partially excluded from the calculation of ‘own funds’. Resolution authorities should ensure that the treatment of instruments in the same category of the sequence of writedown and conversion described in Article 48(1) or Article 60(1) of Directive 2014/59/EU is compliant with the creditor hierarchy in normal insolvency proceedings.

Guiding rule 1 : When applying the bail-in tool or the writedown and conversion power at PONV the resolution authority should treat capital instruments which belong to the same category of the sequence established by Article 48 or Article 60 of the BRRD and which rank equally in insolvency in the same way, whatever their other characteristics or untriggered contractual terms governing writedown and conversion. In particular they should be written down to the same extent or subject to the same terms of conversion. If a contractual trigger event which would result in writedown or conversion of an instrument occurs before or at the same time as the application of either power, the assessment of the creditor hierarchy should reflect the effects of that writedown or conversion.

Guiding rule 2 : When determining the order and amount of writedown or conversion the resolution authority should apply the same treatment to all instruments eligible as own funds according to Part 2 or Part 10, Title 1, Chapter 2 of Regulation (EU) No 575/2013, independently of whether they are fully or partially excluded from counting towards an institution’s own funds. In particular they should be written down to the same extent or subject to the same terms of conversion.

Set out below is guidance on how resolution authorities should apply these guiding rules in particular cases.

Applying guiding rule 1: issued AT1 instruments which fully meet the conditions of Article 52 of Regulation (EU) No 575/2013 and instruments grandfathered according to Part 10, Title 1, Chapter 2 of that regulation with the same ranking in the creditor hierarchy are subject to the same treatment for the purposes of the sequence of the writedown and conversion. In particular they should be written down to the same extent or subject to the same terms of conversion.

In order to be included as own funds, AT1 instruments should meet the conditions of Article 52 of Regulation (EU) No 575/2013. Article 52 provides that AT1 instruments should contain contractual provisions according to which, upon the occurrence of a trigger event, the principal amount of the instruments is written down on a permanent or temporary basis or the instruments is converted to CET1. For the purposes of this provision, Article 54(1), (a) of Regulation (EU) No 575/2013 further requires that AT1 instruments be converted when the CET1 ratio decreases to 5.125%, or higher if specified in the provisions governing the instrument. The provisions of the instrument may include more than one trigger, and must specify either the rate of conversion and limit on permitted amount of conversion, or a range within which the instruments will convert to CET1 (Article 54(1), (b) and (c) of Regulation (EU) No 575/2013).

Directive 2006/48/EC does not provide for the same condition for the purposes of the eligibility of instruments as own funds.

According to the provisions of Part 10, Title 1, Chapter 2 of Regulation (EU) No 575/2013 (grandfathering of capital instruments), items eligible as own funds under national transposition measures for Directive 2006/48/EC are eligible to be calculated in own funds for the purposes of Regulation (EU) No 575/2013 even though they do not meet all the conditions provided for in Articles 52 and following of Regulation (EU) No 575/2013. Thus, grandfathered instruments which do not provide for the contractual trigger of Article 54 of Regulation (EU) No 575/2013 are included in own funds in accordance with the limits laid down in the regulation.

According to guiding rule 1 and in order to ensure respect for the creditor hierarchy, the resolution authority should treat all AT1 instruments which rank equally in insolvency in the same way for the purposes of writedown and conversion (unless otherwise specified in Directive 2014/59/EU) without considering other differences between the loss-absorbing capacity of these AT1 instruments resulting from their contractual clauses. Therefore, in case of application of the bail-in tool or the writedown or conversion power at PONV, the resolution authority should treat equally AT1 instruments issued according to Regulation (EU) No 575/2013 and grandfathered AT1 instruments.

Grandfathered instruments according to Regulation (EU) No 575/2013 are included in own funds according to the limits of Regulation (EU) No 575/2013 (Part 10, Chapter 2), according to which these items are progressively excluded from own funds (¹ ). Applying both guiding rule 1 and guiding rule 2, in the sequence of the writedown and conversion, AT1 items compliant with the rules of Regulation (EU) No 575/2013 and grandfathered instruments including any amount that is progressively excluded from own funds because of the limits set out in Part 10, Chapter 2 of Regulation (EU) No 575/2013 (in particular Article 486) should be subject to the same treatment.

Applying guiding rule 2: T2 instruments under the amortisation regime should be subject to the same treatment as T2 instruments fully included in own funds.

According to the amortisation regime laid down in Article 64 Regulation (EU) No 575/2013, the value of a T2 instrument that can be included in own funds is its nominal value amortised on a straight line basis in the final 5 years before maturity. The amount subject to amortisation is not included in own funds, even if the T2 instrument is eligible according to Article 63 of Regulation (EU) No 575/2013. When determining the order and amount of writedown or conversion the resolution authority should treat in the same way T2 instruments included in the same class and should not apply a discriminatory treatment to issuance of the same T2 instruments.

The amortised amount of the T2 instruments should also be subject to the same treatment as the amount of the T2 instruments included in own funds when the amortisation regime is applied to a grandfathered instrument. In this case, applying guiding rules 1 and 2 and in line with the creditor hierarchy, the full nominal amount of a grandfathered T2 instrument subject to the amortisation regime should be subject to the same treatment as equally ranking T2 instruments in order to determine the sequence and amount of writedown and conversion.

Additionally, AT1 instruments should be treated in the same way regardless of whether or not they are affected by the limits set out in Article 486 of Regulation (EU) No 575/2013.

(¹ ) For the purposes of these guidelines, all the amounts of items calculated as own funds according to the limits provided for in Part 10, Chapter 2 of the CRR are subject to the same treatment.