The European Union’s banking watchdog stated on Thursday that the Norwegian bank DNB is keeping ineligible bonds in one of its primary capital buffers and that they need to be replaced.
In order to ensure that capital buffers don’t contain so-called “legacy instruments” that are too complicated to swiftly access in a crisis, the European Banking Authority (EBA) is closely examining the quality of capital buffers.
Under the updated bank capital regulations of the EU, a June 2025 deadline has been set for the removal of discount perpetual securities, or “Discos,” from additional Tier 2 capital.
“The EBA assessed that the discos cannot count as fully eligible Tier 2 instruments of DNB Bank ASA,” the EBA stated in a statement. “This assessment was made after thorough examination of the issues expressed and a review of the particular terms and conditions of the Discos.”
Although Norway is not a member of the European Union, it participates in the bloc’s internal market and, as such, is subject to EU legislation.
The EBA stated in a letter to a law firm in Norway that the discos in question should have been “grandfathered,” or phased out, by January 2020 to allay “various concerns” from bondholders regarding the inclusion of discos in DNB’s capital buffer.
Regulators are concerned that including faulty instruments in a bank’s core capital may affect other components of the safety buffer and make it more difficult to close a failing institution.
The EBA stated that it has shared the findings with Norway’s regulator for its “consideration and to take the required steps,” but it neither provided a price for the discs nor a date for replacing them.
The EBA announced that it would continue to keep an eye on the remaining stock of legacy instruments held by several EU banks.