Summary of findings, scoring and supervisory measures
Following the above assessment, competent authorities should form a view on whether existing own funds resources provide sound coverage of the risks to which the institution is or might be exposed. This view should be reflected in a summary of findings, accompanied by a viability score based on the considerations specified in table 15.
In setting the score for capital adequacy, where applicable, competent authorities should consider the score of the overall recovery capacity with regard to capital (weak, adequate with potential room for improvement, or satisfactory) as specified in paragraphs 41 to 43 of the EBA Guidelines on Overall Recovery Capacity in Recovery Planning(53). The consideration of the overall recovery capacity score in the context of capital adequacy is especially relevant in case of a ‘weak’ overall recovery capacity score for capital.
Table 15. Supervisory considerations for assigning a score to capital adequacy
Supervisory view | Considerations |
The quantity and composition of own funds held pose a low level of risk to the viability of the institution. | • The institution is able to comfortably meet its P2G and P2G LR. • The institution holds a level of own funds comfortably above its OCR and OLRR, and is expected to do so in the future. • Stress testing does not reveal any discernible risk regarding the impact of a severe but plausible economic downturn on own funds or leverage. • The free flow of capital between entities in the group, where relevant, is not impeded, or all entities are well capitalised above supervisory requirements. • The institution has a plausible and credible capital plan that has the potential to be effective if required. • The overall recovery capacity of the institution with regard to capital, resulting from the supervisory assessment, is ‘satisfactory’. • There is no material/a very low risk of excessive leverage. |
The quantity and composition of own funds held pose a medium-low level of risk to the viability of the institution. | • The institution has difficulty meeting its P2G or P2G LR. Management mitigating actions to address this are assessed as credible. • The institution is near to breaching some of its capital buffers but is still clearly above its TSCR and TSLRR. • Stress testing reveals a low level of risk regarding the impact of a severe but plausible economic downturn on own funds or leverage, but management actions to address this seem credible. • The free flow of capital between entities in the group, where relevant, is or could be marginally impeded. • The institution has a plausible and credible capital plan that, although not without risk, has the potential to be effective if required. • The overall recovery capacity of the institution with regard to capital, resulting from the supervisory assessment, is ‘satisfactory’ or ‘adequate with room for improvement’. • There is a low level of risk of excessive leverage. |
The quantity and composition of own funds held pose a medium-high level of risk to the viability of the institution. | • The institution does not meet its P2G or P2G LR. There are concerns about the credibility of management mitigating actions to address this. |
Score
1
2
3
Supervisory view | Considerations |
• The institution is using some of its capital buffers. There is potential for the institution to breach its TSCR or TSLRR if the situation deteriorates. • Stress testing reveals a medium level of risk regarding the impact of a severe but plausible economic downturn on own funds or leverage. Management actions may not credibly address this. • The free flow of capital between entities in the group, where relevant, is impeded. • The institution has a capital plan that is unlikely to be effective. • The overall recovery capacity of the institution with regard to capital, resulting from the supervisory assessment, is ‘adequate with room for improvement’ or ‘weak’. • There is a medium level of risk of excessive leverage. | |
The quantity and composition of own funds held pose a high level of risk to the viability of the institution. | • The institution does not meet its P2G or P2G LR (or deliberately has not established P2G or P2G LR) and will not be able to do so in the foreseeable future. Management mitigating actions to address this are assessed as not credible. • The institution is near to breaching its TSCR or TSLRR. • Stress testing reveals that TSCR or TSLRR would be breached near the beginning of a severe but plausible economic downturn. Management actions will not credibly address this. • The free flow of capital between entities in the group, where relevant, is impeded. • The institution has no capital plan, or one that is manifestly inadequate. • The overall recovery capacity of the institution with regard to capital, resulting from the supervisory assessment, is ‘weak’ • There is a high level of risk of excessive leverage. |
Score
4
The table below provides a non-exhaustive list of supervisory measures that competent authorities may take in case of identified deficiencies in the institution’s capital adequacy, including in stress conditions. Competent authorities should decide on the type of supervisory measure based on its effectiveness to the specific identified deficiency. Competent authorities may apply additional supervisory measures or a combination of them if these are deemed more appropriate to address the identified deficiencies.
Table 16. Potential and non-exhaustive supervisory measures for capital adequacy Potential supervisory measures for competent authorities in accordance with Article 104(1), points (a), (c) (h), (i), and (j), of Directive 2013/36/EU – Competent authorities may require the institution to: A. hold additional own funds requirements by setting TSCR and determining P2G, where relevant B. submit a credible capital plan that addresses the risk of not meeting its applicable capital requirements, in case the quantitative outcomes of the stress tests indicate that, under the given stress scenarios, an institution will not be able to meet the requirements, and set a deadline for its implementation; C. make changes to capital plans as appropriate, including to the proposed management actions, or take additional mitigating actions that would become relevant given the scenarios and current macroeconomic conditions; D. limit variable remuneration as a percentage of net revenues where it is inconsistent with the maintenance of a sound capital base; E. restrict or limit its business or operations or divest activities that pose excessive risks to its soundness; E. reduce the risk inherent in certain activities, products and systems of institutions, including activities provided by third-parties; F. use net profits to strengthen own funds; G. restrict or prohibit distributions or interest payments to shareholders, members or holders of Additional Tier 1 instruments where such a prohibition does not constitute an event of default; H. impose additional or more frequent reporting requirements, including reporting on own funds and leverage.
When competent authorities assess the credibility of the capital plan or the revised capital plan, in line with points B. and C. of table 16, they should consider the following criteria:
it covers the entire assumed stress testing time horizon;
it puts forward a set of credible mitigating and management actions, such as restricting dividend payments, etc.;
the institution is willing and able to take such actions in order to address the breaches of the applicable capital requirements in the system-wide stress tests;
whether the mitigating and management actions are subject to any legal or reputational constraints, for instance due to contrary or conflicting former public announcements (e.g. on dividend policies, business plans and risk appetite);
the probability that mitigating and management action would enable the institution to fully meet its applicable capital requirements within an appropriate timeframe;
the proposed actions are broadly in line with macroeconomic considerations and with known future regulatory changes affecting an institution within the scope and timeline of the assumed adverse scenarios;
the range of recovery options and their analysis as set out in the institution’s recovery plan.
Competent authorities should expect institutions to implement the revised capital plan, including further changes made based on the results of the supervisory assessment of and dialogue with the institution.