EU banking watchdog reveals ruling that prompted BNP to rejig capital -January 11, 2024 at 05:00 am EST

LONDON, Jan 11 (Reuters) – The European Union’s banking
watchdog said on Thursday that millions of euros of capital used
by BNP Paribas in its safety buffers were ineligible
and must be removed, a step the bank flagged last month that it
would take.

The European Banking Authority (EBA) has been cleaning up
capital used by lenders in ‘Tier 2’ buffers that supplement core
capital, in particular targeting “discos” or perpetual bonds
that were issued during the 1980s.

The EBA has said the complexity of discos could hamper how a
bank is wound down in a crisis, and must be replaced by a
simpler, more readily available form of capital that complies
with EU rules.

The need for barrier-free, speedy closures of failing backs
to stem contagion and fear spreading in markets was highlighted
last year when several U.S. banks collapsed and Switzerland’s
Credit Suisse had to be rescued.

“The EBA has advised that the instrument cannot count as
fully eligible Tier 2 instrument of BNPP (BNP Paribas),” the
watchdog said in a letter to lawyers representing holders of the
notes and published on Thursday.

The notes were issued in 1986 and should have been phased
out by Dec. 31, 2021, as made clear in the EBA’s “opinion” in
October 2020 on legacy instruments, the watchdog added.

Last month, BNP said it would no longer include discos and
other subordinated instruments totalling 726 million euros ($794
million) in its regulatory capital from Dec. 31, 2023.

It gave no reason for the decision.

A year ago, the EBA made a similar ruling on discos
totalling $565 million held by Norway’s DNB Bank.

“The big part of the job of cleaning up discos is now done,
with BNPP the last big one. The rest is more niche,” said
Delphine Reymondon, head of liquidity, leverage, loss absorbency
and capital at the EBA.

“There is only a tiny amount left as the stock of discos has
now shrunk. This shows that issuers take opinions seriously.”
(Reporting by Huw Jones
Editing by Mark Potter)