4.15. Criteria for classification as CET1 Capital
A capital instrument issued by a Bank is eligible for classification as common equity and for inclusion in CET 1 Capital, only if all of the following criteria in sub-rules (1) to (14) below are satisfied:
(1) The instrument is the most subordinated claim in case of the liquidation of the Bank.
(2) The holder of the instrument is entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation. The claim must be unlimited and variable and must be neither fixed nor capped.
(3) The principal amount of the instrument is perpetual and never repayable except in liquidation. Discretionary repurchases and other discretionary means of reducing capital allowed by law do not constitute repayment.
(4) The Bank must not create an expectation at issuance that the instrument will be bought back, redeemed or cancelled. The statutory or contractual terms must not provide anything that might give rise to such an expectation.
(5) Distributions are paid out of distributable items of the Bank (including retained earnings) and the amount of distributions:
- (a) is not tied or linked to the amount paid in at issuance; and
- (b) is not subject to a contractual cap (except to the extent that a Bank may not pay distributions that exceed the amount of its distributable items).
(6) There are no circumstances under which the distributions are obligatory. Non-payment of distributions must not lead to default.
(7) Distributions are paid only after all legal and contractual obligations have been met and payments on all more senior capital instruments have been made. There are no preferential distributions to any pre-defined specified parties, including in relation to other CET1 Capital instruments and the terms of the instrument must not provide any preferential rights for payment of distributions.
(8) Compared to all the capital instruments issued by the Bank, the instrument must absorb the first and proportionately greatest share of any losses as they occur, and each instrument absorbs losses on a going-concern basis to the same degree as all other CET1 Capital instruments. Note This criterion in (8) above would be considered as fulfilled if the instrument includes a permanent write-down mechanism, as referred in Rule 4.17 (11) and 4.20.
(9) The paid-up amount is recognised as equity capital (rather than as a liability) for determining balance-sheet insolvency.
(10) The paid-in amount is classified as equity in accordance with the relevant accounting standards.
(11) The instrument is directly issued and paid-in, and the Bank has not directly or indirectly funded the purchase of the instrument.
(12) The paid-in amount is neither secured nor covered by a guarantee of the Bank or a related party, nor subject to any other arrangement that legally or economically enhances the seniority of the holder’s claim in relation to the claims of the Bank’s creditors.
(13) The instrument is issued only with the approval of the owners of the Bank, either given directly by the owners or, if permitted by the applicable law, given by its Governing Body or by other persons authorised by the owners.
(14) The instrument is clearly and separately disclosed on the Bank’s balance sheet.