Title 7 SREP capital assessment
7.1 General considerations
360292. 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.
361293. 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 Parts ThreeP1R, Four and Seven of Regulation (EU) No 575/2013 and Chapter 2 of Regulation (EU) 2017/2402 (‘Pillar 1 own funds requirements’), 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 (‘additionalP2R ownfor fundsrisks requirementsother than risk of excessive leverage and P2R-LR for risk of excessive leverage).
294. 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. AdditionalSuch 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 shouldare bein metline 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 institutionP1R. atTo allperform timessuch 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.
362295. 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.
363296. When setting the additionalP2R own funds requirements and, where relevant, guidanceP2G, competent authorities should:
a. take into account any supervisory measures thatthey thehave competent authority has applied or isare planning to apply to an institution in accordance with Chapter 10 and having regard to paragraphs 386 to 389;
b. clearly justify all elements of additional own funds requirements for P2R and P2R-LR as well as for P2G and P2G-LR;
c. 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.
364297. 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 and reflected in a score basedtaking oninto account the criteriaconsiderations specified at the end of this title.
The SREP capital assessment process
365. After considering the outcomes of the assessment of risks to capital as specified in Title 6, competent authorities should undertake the following steps as part of the SREP capital assessment process:
a. determination of additional own funds requirements for risks other than the risk of excessive leverage;
b. assessment of the risk of excessive leverage and determination of additional own funds requirements to address this risk;
c. reconciliation of P2R, P2R-LR, P2G and P2G-LR with the capital buffers and any macroprudential requirements;
d. determination of TSCR, TSLRR and OCR, OLRR;
e. articulation and justification of own funds requirements;
f. assessment of whether TSCR, TSLRR and OCR, OLRR can be met in stressed conditions;
g. determination of P2G and P2G LR;
h. determination of the capital adequacy score.
7.2 Determining additionalPillar own2 fundsrequirement requirements for risks other than the risk of excessive leverage (P2R)
366298. Competent authorities should determine additionalP2R own funds requirements for risks other than the risk of excessive leverage, where they identify any of the situations listed in Article 104a(1) of Directive 2013/36/EU for an institution, including in particular:
a. the risk of unexpected losses, and of expected losses insufficiently covered by provisions, over a 12-month period (except where Regulation (EU) No 575/2013 specifies own funds requirements over a different period) (‘unexpected losses’), which individual institutions are facing due to their activities, including those reflecting the impact of certain economic and market developments;
b. model deficiencies for internal approaches for the calculation of own funds requirements (‘regulatory model deficiencies’) as assessed in the context of Article 101 of Directive 2013/36/EU;, andexcluding those already covered by the fact that an institution has become bound by the output floor in accordance with Article 92 of Regulation 575/2013;
c. deficiencies in internal governance, including internal control arrangements and other deficiencies, as well as risk arising from the institution’s business model, identified following the risk assessment outlined in Titles 4 to 6, where other supervisory measures have not been effective or are considered insufficient to address the identified deficiencies.
7.2.1 Determining additional own funds to cover unexpected losses
367299. When setting additionalP2R own funds requirements for the risk of unexpected losses pursuant to point (a) of paragraphthe 366following paragraph, competent authorities should consider each type of risk that may posejeopardise a material risk to the institution’s capital position. Competent authorities should set additionalP2R own funds required to cover the risk of unexpected losses by determining the capital considered adequate to cover the type of risk and deducting the relevant part of own funds requirements set out in Parts Three and Four of Regulation (EU) No 575/2013 and Chapter 2 of Regulation (EU) 2017/2402P1R.
368300. ForCompetent the purpose of the previous paragraph, competent authorities should determine on a risk-by-risk basis, the amounts of capital considered adequate, by identifying, assessing and quantifying the risks to which the institution is exposed, andtaking they should take into account theits full risk profile of an institution. The determination of the amounts of capital considered adequate should include:
a. institution-specific risks or elements of such risks that are explicitly excluded from or not explicitlycovered addressed by the Pillar 1 own funds requirementsP1R;
b. institution-specific risks or elements of such risks that are considered not to be sufficiently covered by the applicable Pillar 1 own funds requirementsP1R.
369301. Competent authorities should ensure that the amount of capital considered adequate to cover each risk identified in accordance with Articles 79 to 85 and 87a of Directive 2013/36/EU is not lower than the relevant part of the applicable PillarP1R 1 own funds requirement covering that risk. In exceptional cases where it is overly burdensome, especially for small institutions, to meaningfully disentangle the amount of capital considered adequate foron twoa or more types of risk-by-risk quantified togetherbasis, competent authorities should comply with the first sentence of this paragraph on a best-effort basis, using the ICAAP calculations, supervisory judgement and other sources of information, by determining the level of additional own funds requirements in a conservative manner, having regard to paragraphs 372 to 374.
370302. TheWhen identificationidentifying, assessmentassessing and quantificationquantifying of risks to which the institution is exposed, shouldcompetent beauthorities supportedshould byrely on the following sources of information:
a. the ICAAP and the outcomes of its assessment by the competent authority, including the ICAAP calculations where deemed reliable or partially reliable in accordance with paragraphs 3753066 to 377308;
b. supervisory reporting;
c. the outcome of supervisory assessment, andincluding benchmarking;
d. the outcomes of any relevant previous supervisory activities;, and
e. benchmarking, as well as other relevant inputs, including those arising from interaction and dialogue with the institution.
371303. The ICAAP and outcomes of its assessment should be taken into account by competent authorities as one of the key inputs for the identification and assessment of risks relevant for the institution. The determination of the amount of capital considered adequate and additionalP2R own funds requirements on a risk-by-risk basis should take into account the ICAAP calculations if deemed reliable or partially reliable, as well as the outcomes of supervisory benchmarking and other relevant inputs as appropriate, including the supervisory judgement.
372304. Competent authorities should not allow own funds held pursuant to Article 92 of Regulation (EU) No 575/2013 to be used to meet or offset additional own funds requirements both on an aggregate and on a risk-by-risk basis.
373. For the purposes of Article 98(1), point (f) of Directive 2013/36/EU and the determination of additional own funds requirementsP2R, competent authorities should assess and consider diversification effects arising from geographical, sectoral or any other relevant drivers within each material risk category (intra-risk diversification). For each of the risks to capital covered by Regulation (EU) No 575/2013, such diversification effects should not reduce the minimum own funds requirements calculated in accordance with Article 92 of Regulation (EU) No 575/2013.
374305. However, diversification between risks in different categories, including those covered by Regulation (EU) No 575/2013 (inter-risk diversification) should not be considered as part of the determination of additional own funds requirementsP2R.
ICAAP calculations
375306. Competent authorities should assess the reliability of the ICAAP calculations by assessing whether they are:
a. Granulargranular: the calculations/methodologies should allow the calculations to be broken down by risk type, rather than presenting a single (economic capital) calculation covering all risks. This breakdown should be enabled by the ICAAP methodology itself. Risks should not be excluded from the ICAAP where they are difficult to quantify or where relevant data are not available; estimates may be provided based on available information and including expert judgement. Where deemed appropriate by the competent authority, estimates may be provided through marginal contribution calculations, for example, for risks that cannot be measured on a standalone basis (e.g. credit concentration risk).
b. Crediblecredible: the calculations/methodologies used should demonstrably cover the risk they are looking to address (e.g. the credit concentration risk calculation should use appropriate sector breakdowns that reflect actual correlations and portfolio compositions) and should be sufficiently robust, stable, risk sensitive and conservative to adequately quantify losses associated with the risks. Such calculations/methodologies should be consistent with the institutions’ strategic processes, including the institutions’ risk appetite.;
c. Understandableunderstandable: the underlying drivers and key assumptions of the calculations/methodologies should be clearly specified. A ‘black box’ calculation should not be acceptable. Competent authorities should ensure that the institution provides an explanation of the key assumptions used, including at least time horizon, confidence levels, correlation assumptions, key parameters, the most fallible areas of the models used, and how these are accounted for and corrected in the final ICAAP calculation.;
d. Comparablecomparable: the calculations/methodologies should clearly mention the main assumptions in terms of the overall level of conservatism, the holding periods/risk horizons and confidence levels (or equivalent measurement) in order to allow the adjustment that may be requested or enacted by competent authorities in order to facilitate comparability with peers and supervisory benchmarking.
376307. Competent authorities should further assess the reliability of the ICAAP calculations by comparing them against the outcome of the supervisory benchmarks for the same risks, and other relevant inputs.
377308. An ICAAP calculation should be considered partially reliable where, despite not meeting all the above criteria of paragraph 3066, the calculation still seems highly credible, though this should be on an exceptional basis and accompanied by steps to improve deficiencies identified in the ICAAP calculation.
Supervisory benchmarks and other relevant inputs
378309. Competent authorities should develop and apply risk-specific supervisory benchmarks as a means to challenge ICAAP calculations for those material risks, or elements of such risks, that are not covered or not sufficiently covered by Regulation (EU) No 575/2013, or to further support the determination of risk-by-risk additional own funds requirementP2R, especially where ICAAP calculations for those material risks, or elements of such risks, are deemed unreliable or are unavailable.
379310. The supervisory benchmarks should be developed to provide a prudent, consistent (i.e., as applicable, calibrated to equivalent holding periods/risk horizons and confidence levels as required by Regulation (EU) No 575/2013), transparent and comparable measure with which to calculate and compare across institutions the capital considered adequate for a given type of risk.
380311. GivenWhen theapplying variety of different business models operated by institutions, the outcome of the supervisory benchmarks, maycompetent not be appropriate in every instance for every institution. Competent authorities should addressconsider thisthe bybusiness usingmodel theof mostinstitutions appropriateand, benchmarkto wherethe alternativesextent are availableappropriate, andcomplement bythese applyingwith judgement to the outcomeapplication of thesupervisory benchmarkjudgement to account for business-model-specific and institution-specific considerations.
381312. When competent authorities take supervisory benchmarks into consideration for the determination of additional own funds requirements, as part of the dialogue, they should explain to the institution the rationale and general underlying principles behind the benchmarks.
Other relevant inputs
382. Competent authorities should use other relevant inputs to support the determination of risk-by-risk additional own funds requirementsP2R. Other relevant inputs may include the outcomes of risk assessments (following the criteria specified in Title 6), peer-group comparisons, including report(s) issuedand by the EBA pursuant to the requirements of Article 78 of Directive 2013/36/EU, benchmarks issued by the EBA pursuant to Article 101 of Directive 2013/36/EU, etc.
383313. Other relevant inputs should prompt the competent authority to reassess the appropriateness/reliability of an ICAAP/supervisory benchmarks for a specific risk, and/or make adjustments to the outcome, where they prompt doubts about its accuracy (e.g. where the risk score implies a significantly different level of risk relative to the calculation, or where peer reviews reveal that the institution differs significantly from peers in terms of the own funds requirement to cover a comparable risk exposure).
384314. To ensure consistency in determining additional risk-by-risk own funds requirementsP2R, competent authorities should use the same peer groups established to analyse risks to capital as specified in Title 6.
385315. When competent authorities take supervisory benchmarks as well as other relevant inputs into consideration for the determination of additional own funds requirementsP2R, as part of the dialogue with the institution, they should explain to the institution the rationale and general underlying principles behind the inputs used.
7.2.2 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
386316. If, during the ongoing review of internal approaches pursuantfor the calculation of own funds requirements, competent authorities identify model deficiencies that could lead to underestimation of the requirementsP1R, 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:
a. 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;
b. by taking into account whether the institution has become bound by the output floor in accordance with Article 10192 of DirectiveRegulation 2013(EU) No 575/36/2013 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.
317. When an institution becomes bound by the output floor as set out in Article 92(3) of Regulation (EU) No 575/2013, orcompetent throughauthorities should:
a. ensure the peernominal analysisamount conductedof pursuantP2R todoes not automatically increase as a result of the institution becoming bound by the output floor (‘temporary cap’), in accordance with Article 78104a(6) point (a) of Directive 2013/36/EU. To this end, competentthe authoritiesapplicable identifypercentage modelof deficienciesthe thatP2R couldpreviously leadcommunicated to underestimationthe ofinstitution by the minimumcompetent ownauthority fundsfollowing requirementsthe last SREP cycle will be applied to the institution’s unfloored TREA (U-TREA), as set byout in Article 92(4) of Regulation (EU) No 575/2013,. theyThis shouldapproach setwill additionalremain ownin fundsplace requirementsuntil forthe modelperformance deficienciesof thatthe couldreview leaddescribed toin underestimationpoint b;
b. without delay, and no later than the end date of riskthe wherenext thisSREP, isreview determinedthe toP2R beimposed moreon appropriatethe thaninstitution otherin supervisoryaccordance measureswith Article 104(1), point (a) of Directive 2013/36/EU. CompetentAs part of this review, competent authorities should:
i. onlyremove setany additionalpart of the P2R that may be covering regulatory model deficiencies for the calculation of own funds requirements tothat coveris thesealready deficienciescovered by the output floor, in order to eliminate any potential double-counting effects;
ii. consider whether there are arithmetic effects (i.e. where itthe P2R nominal amount increase is not possibledue to addressan 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 underas Pillarappropriate;
c. 1communicate to the institutions the applicable own funds requirements throughfollowing otherthe supervisoryreview measuresin point (b), suchemphasising, asin requiringparticular, any findings related to double counting elements. Competent authorities may also require institutions to adjustdisclose, as part of their modelsPillar 3 reporting, the impact of either the temporary cap or applythe anreview appropriateof margindouble counting
whichever is applicable at the reference date – on the reported P2R.
318. For the purpose of conservatismthe previous paragraph, competent authorities should encourage institutions to theirinform them at an early stage when they foresee (based on estimates) they may become bound by the output floor. SuchThis additionalis ownto fundsfacilitate requirementsas far as possible, the review of double counting elements described in the previous paragraph.
319. Competent authorities should onlyperform bethe setreview 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 interiminstitution measureis whilebound by the deficienciesoutput floor, no additional own funds requirements shall be imposed that would double-count the risks that are addressedalready 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.
7.2.3 Determining own funds or other measures to cover other deficiencies
387320. Competent authorities should set additionalP2R own funds to cover deficiencies in governance, controls, business model or other deficiencies – identified following the risk assessment outlined in Titles 4 to 6 – where other supervisory measures arehave considerednot insufficientbeen effective or notare appropriateconsidered insufficient to ensureaddress compliance with the requirementsidentified deficiencies. Competent authorities should only set such additionalP2R own funds requirements as an interim measure while the deficiencies are addressed.
388321. Competent authorities should only set additionalP2R own funds requirements to cover funding risk – identified following the risk assessment outlined in Title 8 – where this is determined to be more appropriate than other supervisory measures applied in accordance with Title 9.
389322. Where an institution repeatedly fails to establish or maintain an adequate level of own funds to cover the guidance communicated in accordance with Article 104b(3) of Directive 2013/36/EUP2G, competent authorities should set additionalP2R own funds requirements to cover that additional risk not later than 2 years after the breach of guidance. Competent authorities may postpone that decision where they allow institutions to operate below the level of guidance due to economic or market conditions or institution-specific circumstances, in line with paragraphs 5844522 and 585453.
7.2.4 Determining the composition of additionalPillar own2 funds requirements
390323. CompetentWhere authoritiesnecessary, shouldand sethaving regard to the compositioninstitution’s ofspecific additionalcircumstances, owncompetent fundsauthorities requirementsmay asdecide atto leastrequire 56.25%the Commoninstitution Equityto Tiercover 1P2R (CET1)with anda athigher leastquality 75%of Tiercapital 1.than Competentthat authoritiesreferred mayto setin theArticle composition104a(4) of additionalDirective own2013/36/EU. fundsThis requirementsdecision forshould allbe risksclearly otherjustified, thanhighlighting the riskspecific ofcircumstances excessivethat leverageled onto anit. aggregatedIn level.
391.their Wherejustifications necessary,competent andauthorities havingshould regardrefer to elements such as:
a. the specific circumstancesnature of anthe institution, competentits authoritiesshareholding maystructure requireand, institutionswhere torelevant, coverthe additionalgroup ownstructure, fundspotentially requirementsaffecting withthe apossibility higher quality of capital than that referred to inraise paragraph 390capital;
b. Anythe impositionspecific ofnature a higher quality of capitalrisks shouldfaced beby justifiedthe institution, takingpotentially intoleading accountto thea individualparticularly riskrapid situationdepletion of theCET1 institutioncapital.
7.3 andPillar consideration2 ofrequirements risksfor thatthe mayrisk require high quality of capitalexcessive toleverage cover potential losses.(P2R-LR)
7324.3 AdditionalWhere, ownas fundsa requirementsresult forof the risk of excessive leverage
392. Inassessment, in accordance with Article 104a (3) and (4), of Directive 2013/36/EU, competent authorities should assess the risk of excessive leverage separately from other types of risk. Where, as a result of such an assessment, competent authorities determine additionalP2R-LR own funds requirement to address thethis risk of excessive leverage, they should add this requirement to the own funds requirement based on the leverage ratio as set out in Article 92(1), point (d), of Regulation (EU) No 575/2013 and not to the ownP1R funds requirements based on the total risk exposure amount (TREA) as set out in Article 92(1), points (a) to (c) of that paragraph of the article. Competent authorities should consider the leverage ratio requirement and theP2R-LR additional own funds requirement to address the risk of excessive leverage as a separate stack from the TREA-based requirements and additionalP2R own funds requirements for all other types of risk (i.e. available own funds can simultaneously be used to meet requirements in the TREA-based stack and in the leverage ratio-based stack of own funds requirements).
7.3.1 Assessment of risk of excessive leverage
393325. In line with the concept of the leverage ratio (and its stack of requirements) as a backstop to the TREA-based own funds requirements, in the assessment of the risk of excessive leverage as defined in Article 4(1), point (93) and (94) of Regulation (EU) No 575/2013, competent authorities should focus on potential material vulnerabilities not covered or not sufficiently covered by the own funds requirements as set out in Article 92(1), point (d), of Regulation (EU) 575/2013 that may require corrective measures to the business activities of the institution, that were not envisaged in its business plan.
394326. In assessing the risk of excessive leverage, competent authorities should consider all of the following aspects and they should adapt the depth of the assessment of each aspect dependingin onaccordance with its relevance forto the institution:
a. The elements of risk of excessive leverage that are considered not covered or not sufficiently covered by the leverage ratio own funds requirement set out in Article 92(1), point (d), of Regulation (EU) No 575/2013, as a result of, in particular:
i. regulatory arbitrage / optimisation of the leverage ratio by exchanging exposures counted in the leverage ratio for economically similar exposures that may be less counted in the leverage ratio exposure calculation;
ii. regulatory arbitrage / optimisation by minimising the leverage ratio exposure in the form of temporary reductions ofin transaction volumes in key financial markets (particularly in the money market, ofin certain activities such as SFTs, but also in the derivative market) around reference dates, resulting in the reporting and public disclosure of elevated leverage ratios (‘window-dressing activities’); and
iii. specific features of the business model, business activities or other bank idiosyncrasies that either increase or decrease the extent to which the institution is exposed to the risk of excessive leverage, (e.g. as per the aspects in paragraph 393) but are not covered or not sufficiently covered in the calculation of the leverage ratio. Competent authorities should consider, where applicable, high exposures to written options on equity or short positions via credit derivatives that may have an elevated exposure to peak losses, as these positions are not fully captured in the leverage ratio exposure (in contrast to, for example, written credit derivatives), and concentrations in certain off-balance sheet items where the idiosyncrasies inherent to the business activities of the institution may lead to increased volatility in drawdowns.;
b. the elements of risk of excessive leverage that are explicitly excluded from or not explicitly addressed by the leverage ratio own funds requirement, including due to the exclusions listed in Article 429a of Regulation (EU) No 575/2013, particularly where there are concerns about the assessment of continued compliance with the conditions for these exclusions and where the reliance on a single exclusion is highly significant for the institution and the amount excluded is unduly volatile;
c. the changes in the institution’s leverage ratio and its components, including the foreseeable impact of current and future expected losses on the leverage ratio, taking into account the business model of the institution.
7.3.2 Determination of additional own funds requirement to address the risk of excessive leverageP2R-LR
395327. OnCompetent the basis of the assessment performed under Section 7.3.1 of these Guidelines, competent authorities should determine the additionalP2R-LR own funds requirements to address the risk of excessive leverage as the difference between the capital considered adequate to cover the risk of excessive leverage and the leverage ratio own funds requirements as set out in Article 92(1), point (d), of Regulation (EU) No 575/2013. This amount cannot be negative.
396328. When setting additionalP2R-LR, own funds requirements to address the risk of excessive leverage competent authorities should consider in particular:
a.) elements of risk of excessive leverage that are considered not covered or not sufficiently covered by the leverage ratio own funds requirement set out in Article 92(1), point (d), of Regulation (EU) No 575/2013, particularly where the assessment of the aspects described in paragraphs 3933255 orand 394326 indicate a high vulnerability when compared to the leverage ratio exposure.;
b.) elements of risk of excessive leverage that are explicitly excluded from or not explicitly addressed by the leverage ratio own funds requirement, including due to the exclusions listed in Article 429a(1), of Regulation (EU) No 575/2013, assessed in accordance with paragraph 394b3263, point b. Competent authorities should set additionalP2R-LR own funds requirements only in those cases, where particularly extensive use of a certain exclusion results in a level of leverage ratio that does not appropriately reflect the risk faced by the institution.
397329. Competent authorities should ensure that the capital considered adequate to cover the risk of excessive leverage is not lower than the leverage ratio own funds requirements (i.e. the additional own funds requirements to address the risk of excessive leverage cannot be negative).
398. Competent authorities should identify, assess and quantify the risk of excessive leverage followingusing the sources of information and methods set out in paragraphs 370302 and 371303, using the available sources of information to the extent that they are relevant for thethis risk of excessive leverage.
7.3.3 Composition of additional own funds requirement to address the risk of excessive leverageP2R-LR
399330. Competent authorities should add the additionalP2R-LR own funds requirement to address the risk of excessive leverage to the minimum leverage ratio Tier 1 requirement. In order to meet this additional requirement, institutions should also be able to use any Tier 1 capital.
400331. Where necessary, and having regard to the institutions’ specific circumstances of an institution, competent authorities may decide to require institutions to cover additionalP2R-LR own funds requirements with a higher quality of capital than that referredspecified to in paragraphthe 399previous paragraph. AnyThis impositiondecision ofshould abe higherclearly qualityjustified, ofhighlighting capitalthe shouldspecific becircumstances justifiedthat led to it, taking into account the individual risk situation of the institution and considering situations where materialisation of the risk of excessive leverage may require a higher quality of capital to cover potential losses.
7.4 Reconciliation with the capital buffers and any macroprudential requirements
401332. In determining additionalPillar own2 funds requirements (or other capital measures), competent authorities should reconcile the additionalPillar own2 funds requirements with any existing capital buffer requirements by addressing the same risks or elements of those risks. Competent authorities should not set additionalPillar own2 funds requirements or other capital measures (including P2G) where the same risk is already covered by specific capital buffer requirements. Any additionalPillar own2 funds requirements or other capital measures should be institution-specific and should not cover macroprudential or systemic risks. However, in line with Article 104a(1), point (f) of Directive 2013/36/EU, they can cover the risks reflecting the impact of certain economic conditions and market developments on the risk profile of an individual institution.
7.5 Determining the TSCR, TSLRR, OCR and OLRR
402333. Competent authorities should determine and express the TSCR (in terms of totalCET1 ownCapital, funds)Tier as1 theCapital sumand of:
a.Total theOwn ownFunds fundsin requirementaccordance pursuantwith totable Article14 92(1), point (c) of Regulation (EU) No 575/2013; andbelow:
bTable 14. theDetermination sum of theTSCR additional own funds requirements (determined in accordanceterms withof theCET1, criteriaT1 specified in Section 7.2) and anytotal additional own funds determined to be necessary to cover material inter-risk concentrations.
403. TSCR Competent= authorities(a) should+ determine(b) theComponent TSCR(a) Component (inb)
In terms of TierCET1 1Capital Own capital)funds asrequirement theunder sumP2R of:
a.required theto ownbe fundsheld requirementin pursuantCET1 to Article 92(1), point (ba), of Regulation (EU) capital in accordance with Section No 575/2013; and
b7.2
In theterms part of theTier additional1 ownCapital Own funds requirementsrequirement referredunder toP2R in point b of paragraph 402, which is required byto thebe competent authority to be held in theTier formArticle 92(1)(b), of TierRegulation (EU) 1 capital.
404. Competentin authoritiesaccordance shouldwith determineSection theNo TSCR575/2013 (in7.2
In terms of CET1)Total asOwn theFunds Own sumfunds of:
a.requirement theunder ownTotal fundsP2R requirementset pursuantin toaccordance with Article 92(1), point (ac), of Regulation (EU) Section 7.2 No 575/2013; and
b334. the part of the additional own funds requirements, referred to in point b of paragraph 402, which is required by the competent authority to be held in the form of CET1 capital.
405. Competent authorities should determine the TSLRR (in terms of Tier 1 capital) as the sum of:
a. the leverage ratio own funds requirement pursuant to Article 92(1), point (d), of Regulation (EU) No 575/2013; and
b. the additional own funds required to address the risk of excessive leverage (determined in accordance with the criteria specified in Sectionsection 7.3).
406335. Where competent authorities require institutions to cover P2R-LR with a higher quality of capital in line with paragraph 400331, they should determine the TSLRR (in terms of CET1) as the part of the additional own funds referred to in point b of paragraphthe 405405405previous paragraph, that is required by the competent authority to be held in the form of CET1 capital.
407336. Where considering the possibility of requiring a higher quality of capital, competent authorities should aim to avoid overlaps with other existing requirements within the relevant TREA-based or leverage ratio-based stack of requirements and with MREL.
337. Competent authorities should determine the OCR as the sum of:
a. TSCR; and
b. combined capital buffer requirements.
408338. Competent authorities should determine the OLRR as the sum of:
a. TSLRR; and
b. the G-SII leverage ratio buffer requirement in accordance with Article 92(1a), of Regulation (EU) No 575/2013.
409339. Competent authorities should not consider items and instruments other than those eligible for the determination of own funds (as defined in Part Two of Regulation (EU) No 575/2013) in the assessment/calculation of the TSCR, TSLRR, OCR or OLRR.
7.6 ArticulationMeeting and justification of own funds requirements
410. Competent authorities should ensure there is consistency in settingstressed additionalconditions own funds requirements and communicating them to the institutions and/or, where relevant, other competent authorities. As a minimum, this should involve communication of:
a. the institution’s TSCR as a proportion (ratio) of the TREA, broken down in terms of the composition of the requirement; and
b. the institution’s TSLRR as a proportion (ratio) of the leverage ratio exposure (LRE), broken down in terms of the composition of the requirement.
411. To communicate the TSCR as a ratio, competent authorities should express it using the following formula:
[formula]
412. To communicate the TSLRR as a ratio, competent authorities should express it using the following formula:
[formula]
413. To achieve further consistency, competent authorities should additionally communicate to institutions and/or, where relevant, other competent authorities:
a. the OCR and its component parts – theUse Pillar 1 own funds requirements, additional own funds requirements to address risks other than the risk of excessiveP2G leverage and theP2G-LR buffer requirements – as a proportion (ratio) of the TREA, broken down in terms of the composition of the requirement;
b. the OLRR and its component parts – the leverage ratio own funds requirement, additional own funds requirements to address the riskquantitative ofoutcomes excessive leverage and G-SII leverage ratio buffer requirement – as a proportion (ratio) of thestress LRE, broken down in terms of the composition of the requirement.testing
414340. When communicating the prudential requirements to institutions, competent authorities should justify their decisions to impose additional own funds requirements in accordance with Article 104a(5) of Directive 2013/36/EU separately for the risk of excessive leverage and for other types of risks. The justification should be institution-specific and should provide a clear indication of the main drivers underlying the additional own funds requirement, including the risks and elements of risks contributing to additional own funds requirements.
415. In justifying additional own funds requirements competent authorities should refer to the extent possible to the categories and subcategories/elements of risk as described in Title 6 and Sections 7.2 and 7.3, taking into account the existing definitions of specific types of risks in the applicable legislation, and they should aim at overall comparability across institutions.
416. In the justification of additional own funds requirements competent authorities should also identify the main deficiencies to be covered by these requirements until they are addressed, in line with paragraphs 386 and 387. Taking into consideration appropriate supervisory measures in accordance with Title 10, competent authorities should request institutions to identify appropriate actions to rectify these deficiencies and communicate expected timelines for rectifying the deficiencies.
417. Competent authorities should communicate to institutions the appropriate minimum composition of additional own funds requirements separately for the risk of excessive leverage and for other types of risk. Where competent authorities use the derogation of the third subparagraph of Article 104a(4) of Directive 2013/36/EU by requiring a higher quality of capital than set out in the first and second subparagraphs of that Article, they should provide clear justification for that decision pointing out specific circumstances of the institution that lead to the need for a higher quality of capital. In their justifications competent authorities should refer to elements such as:
a. the specific nature of the institution, its shareholders and, where relevant, the structure of the group, potentially affecting the possibility to raise capital depending on the characteristics of certain capital instruments;
b. the specific nature of risk faced by the individual institution, potentially leading to particularly rapid depletion of CET1 capital.
418. Competent authorities should communicate the final results of the SREP assessment to the relevant resolution authorities. Competent authorities should provide the information on the additional own funds requirements that is requested by the resolution authorities for the purpose of the estimation referred to in Commission Delegated Regulation (EU) 2021/1118.
419. Where considering the possibility of requiring a higher quality of capital competent authorities should aim to avoid overlaps with other existing requirements within the relevant TREA-based or leverage ratio-based stack of requirements and with MREL.
7.7 Meeting requirements in stressed conditions
420. 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.
421. To assess capital adequacy in stressed conditions, competent authorities should consider:
a. the use of the qualitative outcomes (e.g. deficiencies identified in risk management and control) of institutions’ stress tests and supervisory stress testing; and
b. 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 guidelines11, and including, for example:
i. prescribing specific ‘anchor’ scenarios/assumptions to be implemented by institutions; and
ii. conducting system-wide stress tests using consistent methodologies and scenarios run either by institutions or by supervisors.
422341. 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:
a. OCR including its combined buffer requirements under the baseline scenario over a forward-looking time horizon of at least 2two years; and
b. TSCR under the adverse scenarios over a forward-looking time horizon of at least 2two years.
7342.7.1 Using P2G to address the quantitative outcomes of stress testing
Determining and setting P2G and P2G-LR
423. 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.
424. P2G isshould thenot amountbe used to cover risks or elements of capitalrisks thatalready covered by the P2R in accordance with section 7.2. Similarly, P2G-LR should not be setused to reachcover thethose overallaspects level of ownrisk fundsof consideredexcessive appropriateleverage underalready thecovered SREPby andP2R-LR thein outcomesaccordance ofwith supervisorysection stress tests7.3.
343. The level of P2G should protect against the potential breach of TSCR in thean adverse scenario. TheSimilarly, the level of P2G-LR should protect against the breach of TSLRR in thean 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.
425344. 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 2two years (either top-down or bottom-up).
426345. 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, and portfolio level impacts from consolidated level stress tests), past supervisory stress tests or institutions’ stress tests in accordance with paragraph 421340. The simplified forms of supervisory stress tests may be carried out on an individual basis rather than as part of the system-wide exercise.
427346. Competent authorities should determine and set P2G and P2G-LR in accordance with the minimum engagement model specified in Sectionsection 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.
428347. Notwithstanding the previous paragraph, competent authorities:
a. 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 thethem level of P2G and P2G-LR if necessary;
b. 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 whether P2G and P2G-LR are still relevant or need to be updated, 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.
429348. 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.
430. When determiningcalibrating 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.
349. WithWhen regardcalibrating 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.
431350. 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, asin specifiedaccordance inwith paragraph 435435354. 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.
432351. Where setting the P2G and P2G-LR, competent authorities should ensure an adequate link between thetheir P2Grespective and P2G-LR starting points and,as respectively,well theas their final P2G and P2G-LRvalues. For this purpose, they may decide to use a bucketing approach to classify institutions accordingin toaccordance thewith P2G and P2G-LR starting points, based on the relevant supervisory stress tests set out in paragraph 425344 or based on other approaches set out in paragraph 426345. 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 neighbouringadjacent bucketbuckets, and they should ensure that the resulting final P2G and P2G-LR are institution-specific.
433352. When determining the final P2G and P2G-LR, competent authorities should consider, where relevant and available, the following factors:
a. 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;
b. 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;
c. changes occurring after the cut-off date of the stress test exercise with a material impact on the institutionsinstitution’s 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 institutionsinstitution’s activity or balance sheet;
d. relevant management mitigating actions of the institution that are deemed credible and highly certain following their supervisory assessment;
e. information about and supervisory views on the relevance of supervisory stress testing to the institution’s strategy, financial plans and business model;
f. reduced certainty on the actual sensitivity of the institution to adverse scenarios;
g. any potential overlaps with the P2R or P2R-LR;
h. the institution’s overall recovery capacity as specified in Article 12(3) of Commission Delegated Regulation (EU) 2016/1075, where the institution’sEBA calculationGuidelines ison consideredoverall sufficientlyrecovery reliablecapacity andin realisticrecovery planning;
i. the quality (composition) of the institution’s available own funds, including at the worst year of stress; and
j. whether or not the institution is under restructuring or resolution.
434353. 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 additionalP2R 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.
435354. 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. CompetentIn this regard, competent authorities:
a. should offset P2G against the capital conservation buffer (CCB), as P2G and the CCB overlap in nature;
b. Furthermore,should whilein noexceptional overlapcases isoffset inP2G principleon expecteda betweencase-by-case P2Gbasis andagainst the countercyclical capital buffer (CCyB), competent– authoritieswhile should,no inoverlap exceptionalis cases,in offsetprinciple P2Gexpected onbetween athem 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;
c. 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;
d. 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;
e. may review the P2G communicated to that institution to ensure that its calibration remains appropriate where an institution becomes bound by the output floor, in accordance with Article 104b(4a) of Directive 2013/36/EU.
436355. 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
4377.7 WhenSummary 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.
438. Where P2G or P2G-LR is set or updatedfindings, competentscoring 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.measures
439356. CompetentFollowing 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 riskabove appetite framework and recovery planning.
440. 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.
441. Competent authorities should additionally communicate to institutions and where relevantassessment, other competent authorities, allshould applicableform owna fundsview ratioson affectedwhether byexisting P2G (CET1, T1 and total own funds) andresources leverageprovide ratiosound requirementcoverage affectedof by P2G-LR.
442. When setting and communicating to the institutionsrisks time limits to establishwhich P2G or P2G-LR, competent authorities should consider at least the following:
a. whether or not an institution is under the restructuring or resolution;might and
b.be the potential implications that CET1 denominated P2G or P2G-LR may have for other parts of the capital requirements and the ability of institutions to issue additional Tier 1 (AT1) or Tier 2 (T2) instrumentsexposed.
7.7.2 CapitalThis planningview andshould otherbe supervisoryreflected measures to address capital adequacy in stressed conditions
Capital planning
443. 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 crediblesummary capital plan that addresses the risk of not meeting its applicable capital requirements.
444. To determine the credibility of the capital planfindings, theaccompanied competentby authority should consider, as appropriate:
a. whetherviability thescore capitalbased planon covers the entireconsiderations assumedspecified stressin testingtable time horizon;
b15. whether the capital plan puts forward a set of credible mitigating and management actions, restricting dividend payments, etc.;
c357. whetherIn thesetting institution is willing and able to take such actions in order to address the breachesscore offor the applicable capital requirements in the system-wide stress tests;
d. whether those mitigating and management actions are subject to any legal or reputational constraintsadequacy, forwhere instance due to contrary or conflicting former public announcements (e.g. on dividend policies, business plans and risk appetite);
e. the probability that mitigating and management action would enable the institution to fully meet its applicable capital requirements within an appropriate timeframe; and
f. 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;
g. the range of recovery options and their analysis as set out in the institution’s recovery plan.
445. 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.
446. Competent authorities should expectconsider institutions to implement the revisedscore capital plan, including further changes made based on the results of the supervisoryoverall assessmentrecovery ofcapacity and dialogue with theregard institution.
Additional supervisory measures
447. Competent authorities should, where relevant, consider the application of the additional supervisory measures specified in Title 10, to ensure that the institution is adequately capitalised in stressed conditions.
448. 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 casesweak, theadequate competent authorities should apply appropriate measures in accordance with Articlepotential 104(1)room offor Directive 2013/36/EU aimed at ensuring sufficient levels of own funds. In particularimprovement, when such measures relate to capital, competent authorities should in particular consider one or bothsatisfactory) of the following, as definedspecified in Articleparagraphs 104(1)(a)41 and (f):
a. requiring institutions to hold43 an appropriate amount of additionalthe ownEBA fundsGuidelines inon theOverall formRecovery ofCapacity ain nominalRecovery amount,Planning. consideringThe theconsideration outcome of the SREPoverall assessment;
b.recovery requiringcapacity ascore reduction in the inherentcontext risk of ancapital institution’sadequacy activities, products and systems.
7.8 Summary of findings and scoring
449. 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 orespecially mightrelevant be exposed. This view should be reflected in acase summary of findings,a accompanied‘weak’ byoverall arecovery viabilitycapacity score basedfor on the considerations specified in Table 8capital.
Table 815. - 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.
ScoreThe 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
Supervisory view Considerations
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. • 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. • 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. • There is a high level of risk of excessive leverage.
Score
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
358. 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.
359. 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:
a. it covers the entire assumed stress testing time horizon;
b. it puts forward a set of credible mitigating and management actions, such as restricting dividend payments, etc.;
c. 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;
d. 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);
e. the probability that mitigating and management action would enable the institution to fully meet its applicable capital requirements within an appropriate timeframe;
f. 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;
g. the range of recovery options and their analysis as set out in the institution’s recovery plan.
360. 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.