The European Banking Authority has published an updated report on the monitoring of Additional Tier 1, Tier 2 and total loss absorbing capacity as well as the minimum requirement for own funds and eligible liabilities instruments of EU institutions. The update provides new guidance on the prudential valuation of non-CET1 instruments and on other aspects related to the terms and conditions of the issuances. The report builds upon the 2023 update with substantial amendments made.

Among the matters discussed, the report:

• Clarifies that the prudential valuation of capital instruments should reflect their actual loss absorbency capacity, meaning that such instruments should be measured on the basis of the amount of CET1 capital that would be generated in the event of a write-down or conversion, being the carrying amount with no adjustment.
• Addresses the approaches followed by some institutions to timely reflect from a prudential perspective FX effects on AT1 instruments classified as equity and stresses the need to ensure a consistent application over time when these approaches are used.
• Specifies the conditions under which different loss absorbency and trigger levels can operate simultaneously within the same institution, with the need in particular to fully adhere to the EBA existing guidance and AT1 standardized templates.
• Considers issuances governed by third-country law (including English law) and the bail-in requirement under the Bank Recovery and Resolution Directive.

The EBA also sets out considerations on own funds and eligible liabilities instruments with ESG features. Going forward, the EBA will continue to monitor the quality of the AT1, Tier 2 and TLAC/MREL instruments and stands ready to provide additional guidance where necessary.

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