European Banking Authority Responds To Caius Capital LLP's Challenge Against Regulatory Capital Treatment Of Unicredit CASHES

On July 20, 2018, the EBA published a response following allegations by Caius Capital LLP that UniCredit S.p.A.'s regulatory capital treatment in respect of a 2008 issuance of convertible and subordinated hybrid equity-linked securities (CASHES), which had been sanctioned by regulators, including the ECB, was incorrect. On May 3, 2018, Caius wrote a letter to the EBA, asking it to open an investigation for a breach of EU law on the basis that the structure of the transaction called into question the eligibility of ordinary shares underlying the CASHES as CET1 capital under the EU Capital Requirements Regulation. Caius has since published further letters restating and expanding upon its arguments that a portion of UniCredit's regulatory capital currently recognized as CET1 under the EU rules is ineligible for such classification.

In its response, the EBA indicated that it does not intend to open an investigation into the breach of EU law alleged by Caius. It noted that the CASHES structure had been considered previously by the EBA Board of Supervisors and the relevant national regulators (including the ECB). While the Board of Supervisors was concerned at the time that the CASHES structure was complex and raised concerns from a technical perspective, it took into account the effect of a 2011 restructuring of UniCredit's share capital on the regulatory capital treatment associated with the CASHES. The EBA explained that, as part of this restructuring, the share premium associated with the CASHES transaction was capitalized and was no longer distinguishable from ordinary reserves, allowing it to be treated as Core Tier 1 capital under the EU regulatory capital rules in force at the time. The EBA acknowledged that the alleged breach, if present, could have a significant, direct impact on the EBA's objectives, in particular as regards achieving a sound, effective and consistent level of regulation and supervision, ensuring the transparency of financial markets and promoting equal conditions of competition. However, taking into account its previous position, the information gathered from its preliminary enquiries and the degree of discretion available to competent authorities in determining their annual supervisory examination programmes, the EBA did not consider that there were clear grounds to believe that the ECB had failed to carry out its supervisory responsibilities in a way that breaches its obligations under EU law. The EBA also felt that, pursuant to its Rules of Procedure for investigations into breaches of EU law, Caius' complaint was "more suitable to be dealt with by another person or body," pointing out that national regulators (including the ECB) may request the inclusion of specific own funds instruments in the annual supervisory review conducted by the EBA.

The EBA Response is available at: http://www.eba.europa.eu/documents/10180/2101654/EBA+Letter+to+Caius+Capital+LLP.pdf.

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