Supervisory reaction to a situation where P2G is not met
Competent authorities should monitor whether the amount of own funds expected in accordance with P2G is established and maintained by the institution over time. When the institution’s own funds drop, or are likely to drop, below the level determined by P2G, the competent authority should expect the institution to notify it and prepare a revised capital plan. In its notification, the institution should explain what adverse consequences are likely to force it to do so and what actions are envisaged for the eventual restoration of compliance with P2G as part of an enhanced supervisory dialogue.
There are generally three situations to be considered by a competent authority in which an institution could fail to meet its P2G:
Where the level of own funds falls below the level of P2G (while remaining above OCR) in institution-specific or external circumstances in which risks that P2G was aimed at covering have materialised, the competent authority may allow the institution to temporarily operate below the level of P2G, provided that the revised capital plan is considered credible in accordance with the criteria set out in section 7.7. The competent authority may also consider adjusting the level of P2G where appropriate;
Where the level of own funds falls below the level of P2G (while remaining above the OCR) in institution-specific or external circumstances as a result of the materialisation of risks that P2G was not aimed at covering, competent authorities should expect the institution to increase the level of own funds to the level of P2G within an appropriate timeline;
Where the institution disregards P2G, does not incorporate it into its risk management framework or does not establish own funds to meet P2G within the relevant time limits set out by the competent authority, this may lead to competent authorities applying additional supervisory measures as set out in table 16.
Where the permission to operate below the level of P2G as referred to in point (a) has not been granted and the institution’s own funds are repeatedly below the level of P2G, the competent authority should impose P2R in accordance with Title 7.
Notwithstanding particular supervisory responses in accordance with the previous paragraph, competent authorities may also consider the application of the capital and additional supervisory measures set out in Title 7, where these are deemed more appropriate to address the reasons for the own funds falling below the level determined by P2G.