LONDON (S&P Global Ratings) April 1, 2025--The end of the regulatory grandfathering period on June 28, 2025, could affect our approach to certain EU and U.K. banks' legacy capital instruments, consistent with our published criteria.
Under Article 494b of the EU Capital Requirements Regulation (CRR), bank regulators extended recognition of specified legacy additional tier 1 (AT1) and tier 2 (T2) instruments until June 28, 2025, and permanently extended recognition of certain legacy eligible liabilities (ELs). These extensions are known as grandfathering in industry jargon.
The legacy instruments in question were issued before June 27, 2019, and meet most, but not all, capital qualification criteria set out in the CRR. For example, the bonds may be issued under foreign law and lack contractual recognition of write-down and conversion powers, or they may lack an express waiver of set-off rights.
The U.K. applies the same approach as the EU because it adopted the CRR in domestic law when it withdrew from the EU.
Grandfathered AT1s will not be eligible for our total adjusted capital (TAC) metric after June 28, 2025. This is because our hybrid capital methodology states that we give no equity content to instruments issued by prudentially regulated banks if those issues are not part of regulatory capital (see paragraph 18 of "Hybrid Capital: Methodology And Assumptions," published on Feb. 10, 2025).
In practice, the outstanding principal value of grandfathered AT1s has dwindled due to liability management exercises and issuer calls. Therefore, we see no meaningful effect on our risk-adjusted capital ratios or ratings from the exclusion of grandfathered AT1s from TAC.
Grandfathered T2s will remain eligible for our additional loss-absorbing capacity (ALAC) metric after June 28, 2025, if we consider that they retain capacity to absorb losses in a resolution scenario. Under our rating methodology, regulatory capital recognition is not necessary for these instruments to be included in ALAC (see paragraphs 243-250 of "Financial Institutions Rating Methodology," published on Dec. 9, 2021). In a resolution scenario, even after the legacy T2 issues lose regulatory recognition, we assume authorities would treat these securities in the same way as equal-ranking issues that retain T2 status, unless the legacy bonds have an instrument-specific legal impediment to bail-in.
Similar to AT1s, the outstanding amount of grandfathered T2s has declined due to expiring maturities, liability management exercises, and issuer calls.
We note that legacy T2s may continue to qualify as ELs after they are excluded from regulatory capital at the end of the grandfathering period. However, legacy T2s rank equally with non-legacy T2 instruments. Additionally, CRR Article 63 stipulates that T2 debt must rank below ELs in the capital structure.
HSBC Holdings PLC announced in February 2025 that it will voluntarily exclude legacy T2s from both T2 capital and ELs with immediate effect to avoid the risk of its non-legacy T2s losing capital eligibility when the grandfathering period ends. In this case, the excluded legacy T2 instruments will remain eligible as ALAC if we consider that they retain capacity to absorb losses in a resolution scenario.
Related Criteria
- Hybrid Capital: Methodology And Assumptions, Feb. 10, 2025
- Financial Institutions Rating Methodology, Dec. 9, 2021
This report does not constitute a rating action.
The report is available to RatingsDirect subscribers at www.capitaliq.com. If you are not a subscriber, you may purchase a copy of the report by emailing research_request@spglobal.com. Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box at www.spglobal.com/ratings. Alternatively, call S&P Global Ratings' Global Client Support Line (44) 20-7176-7176.
| Primary Credit Analyst: | Richard Barnes, London + 44 20 7176 7227; richard.barnes@spglobal.com |
| Secondary Contacts: | Giles Edwards, London + 44 20 7176 7014; giles.edwards@spglobal.com |
| Michelle M Brennan, London + 44 20 7176 7205; michelle.brennan@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.