General considerations
Competent authorities should determine through the SREP capital assessment whether the own funds held by the institution provide sound coverage of risks to capital to which the institution is or might be exposed, if such risks are assessed as material to the institution.
Competent authorities should do this by determining and setting the quantity (amount) and quality (composition) of additional own funds the institution is required to hold to cover institution-specific risks and elements of risks that are not covered or not sufficiently covered by P1R, and, where necessary, own funds requirements to address deficiencies in models, controls, governance or other deficiencies, as well as risk arising from the institution’s business model (P2R for risks other than risk of excessive leverage and P2R-LR for risk of excessive leverage).
When a material impact on institution’s capital profile is or may be expected due to relevant changes to the regulatory framework for determining P1R (e.g. increase or decrease in TREA) or to its implementation for the specific institution (such as the output floor), competent authorities should assess such impact in terms of its interaction with the P2R. Such assessment may lead to a redetermination (either upward or downward) of the level or composition of the P2R to ensure that the institution’s overall own funds requirements are in line with Article 104a(1) of Directive 2013/36/EU, in particular that P2R cover risks or elements of risks that are not covered or not sufficiently covered by the P1R. To perform such an assessment, competent authorities may increase the frequency of the SREP assessment as set out in the SREP engagement model in section 2.4 or of specific elements thereof.
To address potential capital inadequacies, including in stressed conditions, competent authorities should take appropriate supervisory measures, including, where relevant, establishing and communicating P2G and P2G-LR which is the quantity (amount) and quality (composition) of own funds that the institution is expected to hold over and above its OCR or its OLRR.
When setting the P2R and, where relevant, P2G, competent authorities should:
take into account any supervisory measures they have applied or are planning to apply to an institution;
clearly justify all elements of additional own funds requirements for P2R and P2R-LR as well as for P2G and P2G-LR;
apply P2R and P2R-LR as well as P2G and P2G-LR in a consistent manner to ensure broad consistency of prudential outcomes across institutions.
Competent authorities should assess the adequacy of the institution’s own funds and the impact of economic stress thereon, as well as risks posed by excessive leverage, as a key determinant of the institution’s viability. This determination should be summarised in a score taking into account the considerations specified at the end of this Title.