British Bankers Association

We fully support harmonisation of supervisory practices between regulators and convergence of the supervisory review process.
We believe that defining the guidelines for the supervisory review process will be a very helpful catalyst in ensuring the consistent application of Pillar 2 throughout the single market, an objective of which we are very supportive.

However, we do think that the guidelines ought to explore in more detail the methodologies used by regulators in assessing and quantifying the risks covered by the supervisory review process. As a first step, the guidelines could include some principles around transparency of the methodologies used by the regulators with a view to achieve some commonality of approach. Failure to go down to this level will frustrate the objective of ensuring consistency of supervisory outcomes for institutions with similar risk profiles across the Union, one of the key objectives set by the EBA in these guidelines.

Another area that is not sufficiently covered by these guidelines is the interaction of Pillar 2 with macro-prudential measures or the CRD IV capital buffers. This is an essential component under the revised Basel 3 and CRD IV framework. CRDIV contemplates a wide range of measures/tools and it is not clear how the various measures will work alongside each other so as not to overlap or in achieving best supervisory outcome. Guidelines could be set out around how Pillar 2/SREP could be used instead of certain macro-tools such as some of the buffers or Art. 458 of the CRR. This will likely be a new area of supervisory divergence.

Finally, the guidelines do not specify disclosure aspects in relation to the SREP and the resulting level of total capital requirements. Guidelines could be set so as to define a common supervisory approach to disclosure. However, consideration ought to be given as to how the SREP is formulated and how this can conflict with disclosure.
In terms of areas where the guidelines may be too prescriptive, we would point out that competent authorities should determine the composition of capital resources to meet the capital requirements emerging from the SREP. Also, the examples given in the guidelines seem to inevitably point to capital as a solution to any regulatory issue identified (including Pillar 1 model deficiencies, governance or even liquidity issues) however, not necessarily considered the most effective or appropriate tool. It is important to consider that more capital may not always be the more appropriate answer to an identified issue/risk and further, that the composition of capital required to meet Pillar 1 risks may not necessarily be the most proportionate and adequate response in relation to Pillar 2 risks identified as part of the supervisory work more generally.
We agree proportionality is an important component of the regulatory architecture. Competent authorities should allocate their resources based on their assessment of the overall risk the failure of an institution could pose to the financial system. The categorisation of institutions into four categories is an appropriate expression of this proportionate approach.

However, it is important to consider the interdependencies between institutions and how this translates into the ultimate level of systemic risk within the financial system. For example, stress testing of the system may need to capture transmission mechanisms of the shocks through some of the institutions outside the defined level 1 category.
No, we are satisfied with what has been identified in the consultation paper.
Yes, we believe the breakdown is comprehensive. However, as per our response to question 1, the guidelines do not further elaborate on the methodologies to use to assess and quantify those risks.
Yes, a common approach to the articulation of any additional own funds would be welcomed. However, capital is not the only answer; risk mitigation plans can often be more beneficial and this is an important component in introducing consistency to the Pillar 2 process.
British Bankers Association