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On January 26, 2016, the European Commission published a report
on the appropriateness of the definition of "eligible
capital" under the CRR. The definition of "eligible
capital" is used for defining large exposures, setting large
exposure limits, determining the prudential treatment of qualifying
holdings outside the financial sector and setting the capital
requirements for investment firms with limited investment
services.
"Eligible capital" is the sum of Tier 1 capital and
Tier 2 capital. However, the amount of Tier 2 capital that will be
recognized as "eligible capital" is restricted, although
the restrictions are subject to a transitional period. The
definition of "eligible capital" replaced the "own
funds" definition from January 1, 2014 and firms were allowed
to fully recognize Tier 2 capital as "eligible capital."
From 2015, firms could only recognize Tier 2 capital for up to 75%
of the amount of Tier 1 capital they held as "eligible
capital," and in 2016 that will move to 50%. Once fully
transitioned, the amount of Tier 2 capital that will be recognized
as "eligible capital" cannot exceed one third of Tier 1
capital. The Commission is required under the CRR to report to the
European Parliament and the European Council on whether the new
definition was appropriate and whether any legislative amendments
should be proposed. Based on the opinion of the EBA in February
2015, the Commission has found that to date there have been no
particular issues over the appropriateness of the definition of
"eligible capital." However, given that the new
definition has been phased in and will only be fully implemented in
2016, the Commission will work with the EBA to continue to monitor
the application of new definition.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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