Question ID:
2017_3088
Legal Act:
Directive 2013/36/EU (CRD)
Topic:
Other issues
Article:
131, 141a
Paragraph:
5
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
n.a.
Disclose name of institution / entity:
Yes
Name of institution / submitter:
Bank Millennium SA
Country of incorporation / residence:
Poland
Type of submitter:
Credit institution
Subject Matter:
O-SII buffer / Capital conservation buffer application
Question:

On which ratio set in article 92 of CRR (CET1/T1 or Total Capital Ratio) the buffers set in part 4 of CRD (Capital conservation buffer and O-SII buffer) should be imposed?

Background on the question:

According to the Article 131(5) CRD, O-SII buffer shall consist of and shall be supplementary to Common Equity Tier 1 capital. That means O-SII buffer is an additional amount imposed on Common Equity Tier 1 capital, and not on total capital. That differentiation is important in terms of required capital ratios to be observed by an institution according to CRR/CRD (minimum levels of CET1 capital ratio, Tier 1 capital ratio and total capital ratio set in Article 92 CRR and capital buffers set in part 4 of CRD).

Example: At the reported date, an institution was identified by a local regulator as an O-SII and was imposed 0,25% of total risk exposure amount O-SII buffer (and was a subject of capital conservation buffer of 1,25%, no SREP buffer, and no AT1 capital). Required CET1 capital ratio is as follow: 4,5% (minimum set in Article 92 CRR) + 0,25% + 1,25% what gives in total 6%. The institution reported the following capital ratios: CET1/T1 capital ratio 7,5% and TCR 9,25%, what indicates that T2 capital is 1,75%.

The doubt arises on what should be the level of required total capital ratio (TCR): 8% (minimum set in art. 92 of CRR) or 9,5% (minimum with added above mentioned combined buffers).

Date of submission:
10/01/2017
Published as Final Q&A:
16/06/2017
Final Answer:

The stacking order of own funds requirements is clarified in the EBA Opinion on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions (EBA/Op/2015/24) and further explained in Q&A 2016_2552.

Since in case an institution has a shortfall of AT1 or Tier 2 capital to meet its total own funds requirements this shortfall should be covered by CET1 capital and both the requirements would act as trigger for calculating the MDA in accordance with the EBA Opinion on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions. When CET1 capital after covering for these shortfalls is not sufficient to meet the overall capital requirement, the MDA calculation – as explained in Q&A 2016_2552  – should apply.

In the case above also Article 141a of Directive 2013/36/EU (CRD) as amended by Directive (EU) 2019/878 should be considered.

For the example provided in the background to the question this means that the overall capital requirement (OCR) for the institution is 9.5% of total own funds (8% minimum own funds + 1.5% combined buffer requirement), 7.5% Tier 1 (6% of minimum own funds and 1.5% combined buffer) and 6% of CET1 (4.5% minimum own funds + 1.5% combined buffer requirement). In the example there are no additional own funds requirements applied.

In the example, the institution has 7.5% of CET1 and T1 and 9.25% of total own funds. This means that Tier 2 accounts for 1.75%.

Based on this example, the institution does not meet the overall capital requirement (OCR) of 9.5% despite meeting its CET1 and T1 components. There is a shortfall of 0.25% to comply with the OCR.

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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