By Huw Jones
LONDON (Reuters) -Norwegian bank DNB is holding ineligible bonds in one of its main capital buffers and they should be replaced, the European Union’s banking watchdog said on Thursday.
The European Banking Authority (EBA) is scrutinising the quality of capital buffers to ensure they do not contain so-called “legacy instruments” which are too complex to tap quickly in a crisis.
A June 2025 deadline has been set for removing discount perpetual securities or ‘Discos’ from supplementary Tier 2 capital under the EU’s revised bank capital rules.
“After careful consideration of the concerns raised, and a scrutiny of the detailed terms and conditions of the Discos, the EBA assessed that the Discos cannot count as fully eligible Tier 2 instruments of DNB Bank ASA,” the EBA said in a statement.
DNB said it took note that the Discos bonds totalling $565 million would no longer be part of its Tier 2 capital as of the start of this year.
   “DNB more than fulfils all capital requirements, despite the removal of the ‘Discos’, but will over time issue other instruments to maintain a certain volume of debt,” it added.
DNB shares were down 0.37% in afternoon trading.
Although Norway is not a member of the European Union, it applies EU law as a member of the European Economic Area, which takes part in the bloc’s internal market.
The Discos in question should have been “grandfathered”, or phased out, by January 2020, the EBA said in a letter to a law firm in Norway to address “several concerns” from bondholders about including Discos in DNB’s capital buffer.
Regulators worry the inclusion of unreliable instruments in a bank’s core capital could impact other parts of the safety buffer, and complicate the process of winding down a troubled bank.
The EBA, which did not give a value for the Discos nor set a deadline for replacing them, said it had shared its findings with Norway’s regulator for its “consideration and to take the necessary steps”.
The EBA said it would continue to monitor the residual stock of legacy instruments held by some banks in the EU.
(Additional reporting by Terje Solsvik in Oslo,Editing by Mark Potter)