2.4.4 Pillar 2 requirement

Pillar 2 refers to the possibility for competent authorities to impose a wide range of measures - including additional capital and liquidity requirements – on a bank on an individual or consolidated basis in order to address higher-than-normal risk. They do that on the basis of a supervisory review and evaluation process (SREP), during which they assess how banks are complying with CRD IV and CRR, the risks they face and the risks they pose to the financial system. Following this review, the competent authorities decide whether e.g. the bank's risk management arrangements and level of own funds ensure a sound management and coverage of the risks they face and pose. If the relevant competent authority finds that the bank faces higher risk, it can require the bank to hold more capital or meet stricter liquidity requirements than the Pillar 1 requirements.1 In taking this decision, competent authorities should notably take into account the potential impact of their decisions on the stability of the financial system in all other Member States concerned.2 The Pillar 2 requirement has to be met with at least 75% of Tier 1 capital, of which again at least 75% should be met with CET1 capital.3

In addition to the mandatory Pillar 2 requirement that competent authorities can impose following the SREP, they can – since 2016 – also communicate to a bank their non-legally binding expectations for such a bank to hold capital in excess of Pillar 1 and Pillar 2 capital requirement and the combined buffer requirement in order to cope with forward looking and remote situations. This is also called ‘capital guidance’.4 Capital guidance can be used to address supervisory concerns in relation to the quantitative results of supervisory stress test outcomes. It has to be met fully in CET 1 capital.5