Meeting requirements in stressed conditions
Competent authorities should determine by means of stress testing the adequacy of the institution’s own funds (quantity and composition) in stressed conditions and whether supervisory measures, including P2G, P2G-LR, revised capital planning and other measures as set out in Title 10 are necessary to address potential inadequacies.
To assess capital adequacy in stressed conditions, competent authorities should consider:
the use of the qualitative outcomes (e.g. deficiencies identified in risk management and control) of institutions’ stress tests and supervisory stress testing; and
the use of the quantitative outcomes of institutions’ stress tests, if the ICAAP is deemed reliable in accordance with paragraph 375, and of supervisory stress tests (i.e. outcomes in terms of changes in own funds ratios), pursuant to Article 100 of Directive 2013/36/EU as specified in Title 12 of these guidelines, and including, for example:
Competent authorities should assess as appropriate the quantitative outcomes of stress tests with regard to the adequacy and quality of the institution's own funds and determine whether the quantity and quality of own funds are sufficient to cover applicable capital requirements, and in particular:
7.7.1Using P2G to address the quantitative outcomes of stress testing
Determining and setting P2G and P2G-LR
Competent authorities should determine P2G and P2G-LR as specified in this section, and, where the determination leads to a positive value, they should set P2G or P2G-LR to address supervisory concerns about the sensitivity of the institution to the adverse scenarios used in the supervisory stress tests.
P2G is the amount of capital that should be set to reach the overall level of own funds considered appropriate under the SREP and the outcomes of supervisory stress tests. The level of P2G should protect against the potential breach of TSCR in the adverse scenario The level of P2G-LR should protect against the breach of TSLRR in the adverse scenario. Where the quantitative outcomes of the supervisory stress tests suggest that the institution is not expected to breach its TSCR under the adverse stress test scenario, competent authorities may decide not to set P2G. Similarly, competent authorities may decide not to set P2G-LR where TSLRR is not expected to be breached under the adverse stress test scenario.
Competent authorities should determine and set P2G and P2G-LR based on the outcomes of the adverse scenario of the relevant supervisory stress tests, including the EU-wide stress tests performed by the EBA or any other relevant supervisory stress tests performed on a system-wide basis using a multi-factor scenario analysis over a forward-looking horizon of at least 2 years (either top-down or bottom-up).
On the basis of establishing a proportionate approach for non-Category 1 institutions and subsidiaries of cross-border groups, for setting and updating P2G and P2G-LR competent authorities may consider the outcomes of simplified forms of supervisory stress tests (e.g. through the use of supervisory prescribed ‘anchor’ scenarios, sensitivity analysis, top-down stress tests conducted by designated authorities, portfolio level impacts from consolidated level stress tests), past supervisory stress tests or institutions’ stress tests in accordance with paragraph 421. The simplified forms of supervisory stress tests may be carried out on an individual basis rather than as part of the system-wide exercise.
Competent authorities should determine and set P2G and P2G-LR in accordance with the minimum engagement model specified in Section 2.2.4. In particular, the minimum frequency with which P2G and P2G-LR are determined and set should be the frequency of the capital adequacy assessment under the SREP minimum-engagement model. In particular, the simplified forms of supervisory stress tests as referred to in paragraph 426426 are not expected to have a greater frequency than the SREP, unless this is considered necessary by the competent authority.
Notwithstanding the previous paragraph, competent authorities:
should assess whether the existing P2G and P2G-LR level is still appropriate whenever the results of new supervisory stress tests are available, and revise the level of P2G and P2G-LR if necessary;
may determine P2G and P2G-LR only every second year instead of annually, including for institutions for which capital adequacy, according to the SREP minimum engagement model, should be assessed annually (e.g. SREP Category 1 institutions). However, in the year that follows the year of determining P2G, competent authorities should assess, on the basis of all relevant information, including outcomes of past supervisory stress tests, together with additional sensitivity analysis (i.e. simplified forms of supervisory stress testing), whether P2G and P2G-LR are still relevant or need to be updated.
Competent authorities should generally not use P2G to cover aspects of risks that should be covered by the additional own funds requirements in accordance with Section 7.2 of these guidelines. Similarly, P2G-LR should not cover those aspects of risk of excessive leverage that are covered by the additional own funds requirements in accordance with Section 7.3 of these guidelines.
When determining the size of P2G, competent authorities should ensure that it is set at a level appropriate to cover at least the anticipated maximum stress impact, which should be calculated based on the changes in the CET1 ratio (i.e. considering both movements in CET1 capital and TREA) in the worst year of stress and taking into account the level of applicable capital requirements and the considerations set out in paragraphs 422422 and 432 to 436. The maximum stress impact for the purpose of setting the P2G should be understood as the difference between the lowest CET1 ratio in the adverse scenario over the stress test horizon and the actual CET1 ratio at the starting point. With regard to the determination of the size of P2G-LR, the maximum stress impact should be calculated based on the changes in the Tier 1 capital in the worst year of stress and taking into account the applicable leverage ratio capital requirements. The maximum stress impact for the purpose of setting the P2G-LR should be understood as the difference between the lowest leverage ratio in the adverse scenario over the stress test horizon and the actual leverage ratio at the starting point.
Competent authorities should obtain the P2G starting point specific for each institution by offsetting elements that already cover risks reflected in the maximum stress impact. In particular, competent authorities should offset the relevant measures, in particular capital conservation buffer, as specified in paragraph 435435. In addition, when setting the P2G and P2G-LR starting points, competent authorities may consider, where relevant, other adjustments to the maximum stress impact related to the static balance sheet assumption or the different time horizon between the stress test exercise and the time of the starting point.
Where setting the P2G and P2G-LR, competent authorities should ensure an adequate link between the P2G and P2G-LR starting points and, respectively, the final P2G and P2G-LR. For this purpose, they may decide to use a bucketing approach to classify institutions according to the P2G and P2G-LR starting points, based on the relevant supervisory stress tests set out in paragraph 425 or based on other approaches set out in paragraph 426. Consequently, competent authorities may assign a fixed range of respectively P2G or P2G-LR levels to each bucket and set the final P2G and P2G-LR within the range of the assigned bucket or, exceptionally, outside the range of the relevant bucket, based on the institution-specific considerations. Competent authorities should aim to avoid cliff effects between buckets, for instance by allowing partial overlap between the P2G or P2G-LR levels for neighbouring bucket, and they should ensure that the resulting final P2G and P2G-LR are institution-specific.
When determining the final P2G and P2G-LR, competent authorities should consider, where relevant, the following factors:
the year when the maximum stress impact occurs in relation to the starting point and time horizon of the scenarios used in the stress tests;
the outcome of a reliable institution stress test, taking into account the specific scenario definitions and assumptions, in particular where they are deemed more relevant for the business model and risk profile of the institution or where the internal scenarios are more severe than the supervisory scenarios;
changes occurring after the cut-off date of the stress test exercise with a material impact on the institutions’ risk profile or capital position (e.g. sale of non-performing loans). These changes may include interim changes of the risk profile including structural changes in the institutions’ activity or balance sheet;
relevant management mitigating actions of the institution that are deemed credible and highly certain following their supervisory assessment;
information about and supervisory views on the relevance of supervisory stress testing to the institution’s strategy, financial plans and business model;
reduced certainty on the actual sensitivity of the institution to adverse scenarios;
any potential overlaps with the P2R or P2R-LR;
the institution’s overall recovery capacity as specified in Article 12(3) of Commission Delegated Regulation (EU) 2016/1075(43), where the institution’s calculation is considered sufficiently reliable and realistic;
the quality (composition) of the institution’s available own funds, including at the worst year of stress; and
whether or not the institution is under restructuring or resolution.
For the purpose of determining P2G in accordance with paragraph 433.b, competent authorities should also consider the extent to which stress scenarios cover all the material risks contributing to the additional own funds requirements in TSCR. Competent authorities should in particular have regard to the fact that macroeconomic downturn scenarios may not entirely capture some risks, for example conduct risk, pension risk or some elements of credit concentration risk (e.g. single name concentration), that may amplify potential losses under the tested adverse scenarios.
In addition, competent authorities should consider the extent to which the existing combined buffer requirements and other applicable measures already cover risks revealed by stress testing. Competent authorities should offset P2G against the capital conservation buffer (CCB), as P2G and the CCB overlap in nature. Furthermore, while no overlap is in principle expected between P2G and the countercyclical capital buffer (CCyB), competent authorities should, in exceptional cases, offset P2G on a case-by-case basis against the CCyB based on the consideration of underlying risks covered by the buffer and factored into the design of the scenarios used for the stress tests, after liaising with the macroprudential authority. Competent authorities should not offset P2G against the systemic risk buffers (G-SII/O-SII buffers and the systemic risk buffer), as those are intended to cover the risks an institution poses to the financial system. Similarly, competent authorities should not offset P2G-LR against the G-SII leverage ratio buffer requirement specified in Article 92(1a) of Regulation (EU) No 575/2013.
Where competent authorities determine P2G, they should add this guidance on top of the OCR. Where competent authorities determine P2G-LR, they should add this guidance on top of OLRR. Competent authorities should consider OCR and OLRR as two separate stacks of requirements. Consequently, the available own funds can simultaneously be used to meet P2G and P2G-LR.
Communication and composition of P2G and P2G-LR
When communicating P2G or P2G-LR to institutions, competent authorities should justify their decisions. The justification should be institution-specific and should highlight the main elements of the methodology used to determine P2G or P2G-LR.
Where P2G or P2G-LR is set or updated, competent authorities should communicate to the institution their levels and the relevant time limits for its establishment in accordance with paragraph 442442. Competent authorities should also explain the potential supervisory reaction to situations where P2G or P2G-LR is not met.
Competent authorities should communicate to institutions that P2G should be met with CET1 eligible own funds and P2G-LR should be met in Tier 1 eligible own funds. Both P2G and P2G-LR should be incorporated into their capital planning and risk management frameworks, including the risk appetite framework and recovery planning.
Competent authorities should also communicate to institutions that own funds held for the purposes of P2G cannot be used to meet any of the elements of OCR and that P2G-LR cannot be used to meet any of the elements of OLRR.
Competent authorities should additionally communicate to institutions and where relevant, other competent authorities, all applicable own funds ratios affected by P2G (CET1, T1 and total own funds) and leverage ratio requirement affected by P2G-LR.
When setting and communicating to the institutions time limits to establish P2G or P2G-LR, competent authorities should consider at least the following:
7.7.2Capital planning and other supervisory measures to address capital adequacy in stressed conditions
Capital planning
When the quantitative outcomes of the stress tests referred to in Section 7.7.1 indicate that, under the given stress scenarios, an institution will not be able to meet the applicable capital requirements, competent authorities should require the institution to submit a credible capital plan that addresses the risk of not meeting its applicable capital requirements.
To determine the credibility of the capital plan, the competent authority should consider, as appropriate:
whether the capital plan covers the entire assumed stress testing time horizon;
whether the capital plan puts forward a set of credible mitigating and management actions, restricting dividend payments, etc.;
whether 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 those 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; and
whether 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.
When assessing capital plans, the competent authority should, where appropriate, following an effective dialogue with the institution, require the institution to make changes to those plans as appropriate, including to the proposed management actions, or require institutions to take additional mitigating actions that would become relevant given the scenarios and current macroeconomic conditions.
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.
Additional supervisory measures
In particular, where the quantitative outcomes of the stress tests indicate that the institution is likely to breach its applicable capital requirements under the adverse scenario within the following 12 months, the competent authorities should, where appropriate, treat such information as one of the possible circumstances within the meaning of Article 102(1)(b) of Directive 2013/36/EU. In such cases, the competent authorities should apply appropriate measures in accordance with Article 104(1) of Directive 2013/36/EU aimed at ensuring sufficient levels of own funds. In particular, when such measures relate to capital, competent authorities should in particular consider one or both of the following, as defined in Article 104(1)(a) and (f):