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Subordinated Loans and Capital Requirements of Banks

Subordinated loan is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings. Subordinated loans are thus also known as junior securities. In the case of borrower default, creditors who own subordinated debt will not be paid out until after senior bondholders are paid in full.

For the purposes of banking regulations, subordinated loans are treated as part of the total capital of the bank (Tier 2) and consequently the Central Bank of Armenia has passed regulations with specific requirements for subordinated loans to be satisfied before these will be considered as part of the capital of the bank for the purposes of capital regulations.

Armenian regulation relating to the subordinated loan.

The Central Bank of Armenia has amended the regulation concerning “The Regulation of banking, Prudential standards for banking”, in the prospective to foresee the minimum requirements necessary for the loan to be considered as subordinated.

As a demonstration of the power devoted to the Central bank is the fact that as long the financial institution or the bank has not obtained the Central Bank’s prior approval for the transaction, the amounts borrowed cannot be included in the additional capital. In that case, the loan will not be considered as subordinated and will rank at the same level as other junior debts of the financial institution.

It is also worth mentioning, that the regulation of the Central Bank anticipates a non-exhaustive list of terms that should be included in the subordinated loan agreement. Examples of such requirements include special repayment provisions as well as conversion into equity in case of certain trigger events. In fact, the control over the compliance of the agreement to the regulations (more specifically the requirements to the subordinated loan) is effected by the Central Bank, who has a final discretion to approve or to reject the transaction.

Legalata law firm, being specialized in banking and financial law, has a vast experience in assisting the clients in the most complex financial operations, including but not limited to the operations implementing the involvement of the state bodies, such as Central Bank of Armenia.

 Co-authors:

Gor Margaryan, Managing Partner

Aleksandr Egibyan/ Associate


Disclaimer

This material is produced by Legelata LLC. The material contained in this newsletter is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this material.

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