Question
As a requirement for Common Equity Tier 1 (CET1) instruments with regard to distributions, the conditions governing the instruments may not include any obligation for the institution to make distributions to their holders and the institution is not otherwise subject to such an obligation (Article 28 (1)( h) (v) of Regulation (EU) No 575/2013 (CRR)). Is a contract with the 100% mother company of an institution according to which distributable profits of the subsidiary need to be fully distributed to the mother company at the end of each year and losses of the subsidiary are to be compensated in full by the mother company to be regarded as an obligation hindering eligibility of the instrument as CET1?
Background on the question
There is a right of termination for both mother company and subsidiary with a notice period of 1 year. The subsidiary is allowed to build reserves if justified by the economic situation. Such contracts are common within groups.
Answer
Article 28(1)(h) of Regulation (EU) No. 575/2013 (CRR) sets out the conditions that must be met with respect to distributions in order to qualify as CET1 instruments. The purpose is to ensure that the issuer has full discretion over the payment of dividends so that the institution can retain capital as necessary. Article 28(1)(h)(v) of the CRR specifically prohibits CET1 instruments from including any obligation for the institution to make distributions. The instrument in question would therefore not be eligible as a CET1 item.