Question
Which bonds can be considered "subordinated debt" under Art. 128 (c)? Only senior non-preferred bonds? Senior Non-Preferred Bonds and Senior Preferred Bonds (which meet the criteria under Art. 72b(3)? Senior Non-Preferred Bonds and Senior Preferred Bonds (that meet the criteria set out in Art. 72b(3) and are recognized as eligible liabilities by the resolution authority)? Senior Non-Preferred Bonds and Senior Preferred Bonds issued by G-SII entities (which meet the criteria set out in Art. 72b(3) and are recognised by the resolution authority as eligible liabilities)?
Background on the question
The amendment to the CRR introduces a new exposure class ("Subordinated Debt Exposures"). Subparagraph (c) refers to "the conditions set out in Article 72b" of the CRR. This article sets out the requirements for financial instruments to qualify as eligible liabilities. As such, senior non-preferred bonds may meet these conditions, as may senior preferred bonds pursuant to Art. 72b(3). For these bonds, the question arises as to whether only those bonds that are permitted by the resolution authority to qualify as eligible liabilities instruments meet the conditions, or whether all bonds that meet the criteria, regardless of whether they are permitted by the resolution authority, are within the scope.
Answer
The treatment as subordinated debt under Article 128(1)(c) of the CRR is restricted to holdings of eligible liabilities instruments that meet the conditions set out in Article 72b. As a consequence, where a liability does not meet all the conditions of Article 72b(2), holding of such liability only qualifies as subordinated debt exposure if the resolution authority has explicitly permitted such liabilities to qualify as eligible liabilities instruments under Article 72b(3) or Article 72b(4) due to meeting the requirements set out therein. In particular, in the case of liabilities recognised under Article 72b(3), the treatment as subordinated debt under Article 128(1)(c) CRR is limited to the percentage of each liability that is permitted by the resolution authority to qualify as eligible liabilities instruments of the issuer (which cannot exceed 3.5% of total risk weighted exposure amount of the issuer but can be less or even zero, depending on whether and how the resolution authority has exercised the discretion under Article 72b(3) in combination with Article 72b(5) CRR). This percentage should be determined consistent with Article 72e(3) CRR, as the ratio of the amount of liabilities included in eligible liabilities items by the issuing institution to the total amount of the outstanding liabilities of the issuing institution referred in Article 72b(3) CRR according to the latest disclosures by the issuer. Importantly, the limit applies with reference to the total risk exposure amount of the issuer, not of the institution holding the liability.