Determining own funds or other measures to cover regulatory model deficiencies not covered by the fact that an institution has become bound by the output floor
If, during the ongoing review of internal approaches for the calculation of own funds requirements, competent authorities identify model deficiencies that could lead to underestimation of the P1R, they should set P2R only where this is determined to be more appropriate than other supervisory measures. Competent authorities should only set P2R to cover these deficiencies:
where it is not possible to address them under P1R through other supervisory measures, such as requiring institutions to adjust their models or apply an appropriate margin of conservatism to their estimates;
by taking into account whether the institution has become bound by the output floor in accordance with Article 92 of Regulation (EU) No 575/2013 and, if this is the case, proceed as explained in the next paragraph.
Such P2R should only be set as an interim measure while the deficiencies are addressed.
When an institution becomes bound by the output floor as set out in Article 92(3) of Regulation (EU) No 575/2013, competent authorities should:
ensure the nominal amount of P2R does not automatically increase as a result of the institution becoming bound by the output floor (‘temporary cap’), in accordance with Article 104a(6) point (a) of Directive 2013/36/EU. To this end, the applicable percentage of the P2R previously communicated to the institution by the competent authority following the last SREP cycle will be applied to the institution’s unfloored TREA (U-TREA), as set out in Article 92(4) of Regulation (EU) No 575/2013. This approach will remain in place until the performance of the review described in point b;
without delay, and no later than the end date of the next SREP, review the P2R imposed on the institution in accordance with Article 104(1), point (a) of Directive 2013/36/EU. As part of this review, competent authorities should:
remove any part of the P2R that may be covering regulatory model deficiencies for the calculation of own funds requirements that is already covered by the output floor, in order to eliminate any potential double-counting effects;
consider whether there are arithmetic effects (i.e. where the P2R nominal amount increase is not due to an increase in risk but results from the P2R being expressed as a percentage of TREA) on the nominal amount of P2R arising from the automatic increase in the TREA due to the fact that the institution has become bound by the output floor, and remove them as appropriate;
communicate to the institutions the applicable own funds requirements following the review in point (b), emphasising, in particular, any findings related to double counting elements. Competent authorities may also require institutions to disclose, as part of their Pillar 3 reporting, the impact of either the temporary cap or the review of double counting
whichever is applicable at the reference date – on the reported P2R.
For the purpose of the previous paragraph, competent authorities should encourage institutions to inform them at an early stage when they foresee (based on estimates) they may become bound by the output floor. This is to facilitate as far as possible, the review of double counting elements described in the previous paragraph.
Competent authorities should perform the review described in paragraph 317 at the time an institution first becomes bound by the output floor. Following the conclusion of this review, the temporary cap on P2R does not apply, and the P2R communicated by competent authorities applies to floored TREA. Competent authorities should have regard to the fact that as long as an institution is bound by the output floor, no additional own funds requirements shall be imposed that would double-count the risks that are already fully covered by the fact that the institution is bound by the output floor, in accordance with Article 104a(8) of Directive 2013/36/EU, and in line with paragraph 2944.