Question ID:
2015_2302
Legal Act:
Directive 2013/36/EU (CRD)
Topic:
Supervisory review and evaluation (SREP) and Pillar 2
Article:
104, 104a, 104a,129, 130, 131
Paragraph:
1, 2(b), 4
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
n.a.
Disclose name of institution / entity:
No
Type of submitter:
Investment firm
Subject Matter:
SREP and combined buffers
Question:

Article 104(1)(a) of the Directive 2013/36/EU (CRD) states that competent authorities have the power to require institutions to hold own funds in excess of the requirements set out in "Chapter 4 and Regulation 575/2013", i.e. in excess of the minimum capital requirements set in the CRR plus the capital buffers. Moreover, Articles 129(5), 130(5) and 131(13) of the CRD prevent the use of CET1 capital required per Article 104 to meet any of the buffer CET1 requirements.

1) When the competent authorities give to an institution an individualised CET1 capital requirement (so-called SREP requirements or Pillar 1 + Pillar 2 requirements), does this include any potential combined buffer requirements, since any additional requirement per Article 104 should come on top of the requirements imposed by Chapter 4 of the CRD and by the CRR ?

2) In particular, if a competent authority changes the systemic risk buffer (SRB) or the other systemically important institutions buffer (O-SIIB) applicable to a bank would this not increase the total Pillar 2 + Pillar 1 requirement of the bank, unless the new Pillar 1 requirement went above the old Pillar 1 + Pillar 2 requirement or unless the competent authority also changed the total SREP requirement of the bank?

Background on the question:

This question is important because under CRD / SSM rules it is not the same competent authorities which set the combined buffer requirements, in particular the counter-cyclical and various systemic risk buffers, and the final pillar 2 + pillar 1 requirements. It could happen that the ECB, acting as SSM supervisor of a bank, set for example a 11% SREP requirement per CRD Article 104 while the combined buffer requirements + minimum CET1 requirement is only 8%, including a 1% O-SIIB. If later in the year a national authority increased the O-SIIB by say 1% for that bank, our understanding is that it would not change the final SREP (Pillar 1 + Pillar 2) requirement - unless the ECB explicitly changed that requirement. In particular, the increase in the O-SSIB would not change the point at which restrictions on distributions (per CRD Article 141) would start to apply, unless the total Pillar 1 requirements would go above the old SREP minimum or the ECB changed the SREP minimum.

Date of submission:
17/09/2015
Published as Final Q&A:
26/08/2016
EBA Answer:

Revised answer:

In accordance with Article 104(1)(a) Directive 2013/36/EU (CRD), Member States must ensure that competent authorities are empowered, inter alia, to require institutions to hold additional own funds requirements that are institution-specific and come in addition to general Pillar 1 and the combined buffer requirements (Pillar 2 capital requirements). Article 104a(1)(a) CRD in particular clarifies the circumstances when Pillar 2 capital requirements shall be applied, including for risks or elements of risks not covered or not sufficiently covered  by the own funds requirements set out in Parts Three, Four and Seven of Regulation (EU) No 575/2013 (CRR) and in Chapter 2 of Regulation (EU) 2017/2402. Pillar 2 capital requirements are determined through the supervisory review and evaluation process (SREP) in accordance with Article 97 CRD and EBA Guidelines on common procedures and methodologies for SREP (EBA/GL/2014/13, SREP Guidelines). Where the SREP for an institution identifies risks or elements of risk that are not or not sufficiently covered by the own funds requirements set out in Parts Three, Four and Seven of Regulation (EU) No 575/2013 (CRR) and in Chapter 2 of Regulation (EU) 2017/2402, or are likely to be underestimated in accordance with Article 104a(2) of the CRD, which is the case where the amounts, types and distribution of capital considered adequate by the competent authority are higher than the own funds requirements, set out in Parts Three, Four and Seven of Regulation (EU) No 575/2013 (CRR) and in Chapter 2 of Regulation (EU) 2017/2402, competent authorities shall impose additional own funds requirements in accordance with Articles 104(1)(a), 104a(1)a and 104a(2) of the CRD.

Parts Three, Four and Seven of the Regulation (EU) No 575/2013 (CRR)  and Chapter 2 of Regulation (EU) 2017/2402 establish the own funds requirements (Pillar 1 capital requirements) with which institutions are required to comply.

In accordance with Chapter 4 of Title VII of Directive 2013/36/EU (CRD), institutions are subject to the combined buffer requirement with various elements of the buffer addressing specific situations as specified in Articles 129, 130, 131 and 133 CRD respectively. Institutions should not use Common Equity Tier 1 capital that is maintained to meet the combined buffer requirement referred to in Article 128(6) CRD to meet any of the requirements set out in points (a), (b) and (c) of Article 92(1) of Regulation (EU) No 575/2013 (CRR), the additional own funds requirements imposed pursuant to Article 104a of CRD to address risks other than the risk of excessive leverage, and the guidance communicated in accordance with Article 104b(3) of CRD to address risks other than the risk of excessive leverage. Institutions shall not use CET1 capital that is maintained to meet one of the elements of its combined buffer requirement to meet the other applicable elements of its combined buffer requirement. Institutions shall not use CET1 capital that is maintained to meet the combined buffer requirement referred to in Article 128(6) CRD to meet the risk-based components of the requirements set out in Articles 92a and 92b of Regulation (EU) No 575/2013 and in Articles 45c and 45d of Directive 2014/59/EU (BRRD). Moreover, own funds that are used to meet the additional own funds requirement referred in Article 104a(1)(a) CRD shall not be used to meet the combined buffer requirement according to the Article 104 a(4) CRD.

These three elements (Pillar 1, Pillar 2 and the combined buffer requirement) form the overall own funds requirements, where Pillar 1 and Pillar 2 capital requirements (referred to as Total SREP Capital Requirement (TSCR) in SREP Guidelines) should be a minimum to be preserved at all times based on an institution-specific assessment of the risks not covered, or not sufficiently covered, by own funds requirements set out in Parts Three, Four and Seven of Regulation (EU) No 575/2013 (CRR) and in Chapter 2 of Regulation (EU) 2017/2402.

Based on the above:

  • TSCR does not include the combined buffer requirement;
  • Competent authorities should not set additional own funds requirements (or other capital measures) where the risk is already covered by the combined buffer requirements and/or additional macro-prudential requirements, e.g. macroeconomic and systemic risks. Any changes within the combined buffer requirement would not affect the TSCR, as the elements of risks covered by Pillar 2 and the combined buffer requirement are different. 

In accordance with the requirements of the EBA Guidelines on common procedures and methodology for SREP (EBA/GL/2014/13 as amended by EBA/GL/2018/03) competent authorities in addition to the TSCR may communicate to the institutions their Overall Capital Requirement (OCR), including the elements of the combined buffer requirement.

P2G, where applicable, should also be communicated to the institution.

Previous answer:

Part Two of the Regulation (EU) No 575/2013 (CRR) establishes the own funds requirements (Pillar 1 capital requirements) with which institutions are required to comply.

In accordance with Chapter 4 of Title VII of Directive 2013/36/EU (CRD), institutions are subject to the combined buffer requirement with various elements of the buffer addressing specific situations as specified in Articles 129, 130 and 131 CRD respectively. The own funds held for the purposes of meeting such combined buffer requirements cannot be used to meet Pillar 2 capital requirements as stipulated in Articles 129(5), 130(5) and 131(13) of the CRD.

Furthermore, in accordance with Article 104(1)(a) CRD, Member States must ensure that competent authorities are empowered, inter alia, to require institutions to hold additional own funds requirements  that are institution-specific and come in addition to general Pillar 1 and the combined buffer requirements (Pillar 2 capital requirements). Article 104(2)(b) CRD in particular clarifies the circumstances when Pillar 2 capital requirements shall be applied, including for risks or elements of risks not covered by Pillar 1 capital requirement or the combined buffer requirements. Pillar 2 capital requirements are determined through the supervisory review and evaluation process (SREP) in accordance with Article 97 CRD and EBA Guidelines on common procedures and methodologies for SREP (EBA/GL/2013/14, SREP Guidelines). Where the SREP for an institution identifies risks or elements of risk that are not covered by the Pillar 1 capital requirements or the combined buffer requirement, competent authorities shall determine the appropriate level of the institution 19s own funds in accordance with Article 104(3) of the CRD and assess whether additional own funds shall be imposed in accordance with Article 104(1)(a) and (2)(b) of the CRD. 

These three elements (Pillar 1, Pillar 2 and the combined buffer requirement) form the overall own funds requirements, where Pillar 1 and Pillar 2 capital requirements (referred to as Total SREP Capital Requirement (TSCR) in SREP Guidelines) should be a minimum to be preserved at all times based on an institution-specific assessment of the risks not covered, or fully covered, by Pillar 1 capital requirements.

Based on the above:

·         TSCR does not include the combined buffer requirement;

·         When determining Pillar 2 capital requirements in accordance with SREP Guidelines competent authorities should reconcile them against any existing combined buffer requirements and/or macroprudential requirements addressing the same risks or elements of those risks. Competent authorities should not set additional own funds requirements (or other capital measures) where the risk is already covered by the combined buffer requirements and/or additional macro-prudential requirements, e.g. macroeconomic and systemic risks. Any changes within the combined buffer requirement would not affect the TSCR, but may affect the reconciliation for the elements of risks covered by Pillar 2 capital requirements to avoid double counting.

In accordance with the requirements of the EBA Guidelines on common procedures and methodology for SREP (EBA/GL/2014/13) competent authorities in addition to the TSCR may communicate to the institutions Overall Capital Requirement (OCR) and its component parts 13 the TSCR, the elements of the combined buffer requirement and any additional own funds requirements to cover macroprudential risks, where applicable.

Status:
Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

Update 26.03.2021: This Q&A has been updated in the light of the changes introduced to Directive 2013/36/EU (CRD).

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