The (Private Law) Legal Position of CET1 Capital Holders in EU Banking Regulation

With the overhaul of the regulatory framework in light of the financial crisis of 2007–2009 the concept of regulatory capital was significantly altered. Qualitative capital requirements, specifically those applicable to common equity tier 1 (CET1), were harmonized in a directly applicable European Regulation (the Capital Requirements Regulation (CRR)) to ensure that a common understanding of regulatory capital would exist between the EU Member States. Yet no direct effect that impacts the private law position of the CET1 holder was (seemingly) awarded to the qualitative requirements, creating certain inherent fragilities in the capital structure which mainly relies on adequate ex ante supervisory control. This article revisits the discussion as to whether the qualitative capital requirements in the CRR do have direct effect based on an analysis of the corpus of case-law that has been created since the introduction of the new regulatory framework. This article finds that although no absolute direct effect can be ascertained, there might be room for the application of a direct effect where financial stability is at stake and the CET1 instruments have entered their regulatory phase. Aspects that play a pivotal role in this potential direct effect are the limitation of fundamental rights, judicial review, and rationale of CET1 capital.