A prohibition on incentive to redeem in capital regulation

Abstract

Pursuant to the Capital Requirement Regulation (CRR) of the EU, a capital instrument has to fulfil several conditions so that a credit institution can count it as a component in its own funds. Most of the conditions listed in the CRR are clear and well-defined, therefore their observance is easy to control. However, some conditions are not so unambiguous, e.g. the prohibition on incentive to redeem is particularly difficult to interpret. The condition above also appears among the requirements of Additional Tier 1 capital, Tier 2 capital and eligible liabilities. This study aims to present the economic logic of the prohibition on incentive to redeem, how the fulfilment of this condition can be checked and how regulatory authorities interpreted the fulfilment of the conditions regarding the prohibition on incentive to redeem in specific cases.