The European Banking Authority (EBA) today published an Opinion on the interaction between the output floor and Pillar 2 Requirements (P2R) in the context of the mandate set forth in the Capital Requirements Directive (CRD). The Opinion considers that the nominal amount of P2R is not to increase as a result of an institution becoming bound by the output floor and highlights the possibility of double counting in setting the P2R of risks already covered by the effects of a binding output floor.Today’s Opinion describes how P2R is to be calculated temporarily based on the unfloored, instead of floored, total risk exposure amount (TREA) when an institution first becomes bound by the output floor, applying the P2R percentage previously communicated following the last supervisory review and evaluation process (SREP) cycle. The Opinion emphasises the importance of institutions informing early their competent authority of the potential impact so as to facilitate the review process.The EBA expects competent authorities in their review on double counting of risks to only consider offsets regarding P2R add-ons in relation to “regulatory model deficiencies”. Furthermore, the EBA advises competent authorities using a methodology that calculates P2R amount based on a multiplication by TREA, to consider how they could ward off undue arithmetic effects from the output floor in the review on double counting.The Opinion will be considered in the forthcoming comprehensive review of the EBA Guidelines on the SREP. Generally, and in line with what was highlighted in the July 2024 Report on the stacking order and capital buffers, the EBA’s efforts will continue to focus on clarifying, where necessary, the interactions of the different stacks, as well as interactions between P2R and the evolution of TREA in a wider manner.Legal basis and backgroundAs per article 104a(7) of Directive 2013/36/EU, the EBA is mandated to issue guidelines to further specify how to operationalise, in particular, the following aspects: how competent authorities are to reflect in their supervisory review and evaluation process the fact that an institution has become bound by the output floor; how competent authorities and institutions are to communicate and disclose the impact on supervisory requirements of an institution becoming bound by the output floor, as per paragraph 6 of the same article. The EBA’s competence to deliver this Opinion is based on Article 29(1)(a) of Regulation (EU) No 1093/2010 and the Opinion is without prejudice to the aforementioned mandate.
Brief
On January 21, 2025, the European Banking Authority (EBA) issued an update regarding EBA publishes an Opinion on the interaction between the output floor and Pillar 2 requirements. The Opinion emphasizes that the nominal amount of Pillar 2 Requirements is not to increase as a result of an institution becoming bound by the output floor, highlighting the possibility of double counting in setting P2R. The EBA provides guidance on calculating P2R temporarily based on unfloored TREA and advises competent authorities to consider offsets regarding "regulatory model deficiencies".
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Purpose
The European Banking Authority (EBA) has published an Opinion on the interaction between the output floor and Pillar 2 Requirements (P2R) in the context of the mandate set forth in the Capital Requirements Directive (CRD). The primary objective of this Opinion is to clarify how P2R should be calculated when an institution first becomes bound by the output floor, as well as to highlight potential double counting issues.
The EBA emphasizes that the nominal amount of P2R should not increase as a result of an institution becoming bound by the output floor. The Opinion also describes how P2R is to be temporarily calculated based on the unfloored total risk exposure amount (TREA) when an institution first becomes bound by the output floor.
Effects on Industry
The publication of this Opinion may have several immediate and long-term effects on the banking industry:
- Clearer guidelines for competent authorities in their review process regarding double counting of risks.
- Emphasis on institutions informing their competent authority early of potential impacts to facilitate the review process.
- Guidance for institutions on how to calculate P2R temporarily based on unfloored TREA, and potentially reducing undue arithmetic effects from the output floor.
Relevant Stakeholders
This Opinion affects various stakeholders in the banking industry, including:
- Competent authorities responsible for reviewing P2R add-ons and addressing double counting issues.
- Institutions bound by the output floor, which must inform their competent authority early of potential impacts and calculate P2R temporarily based on unfloored TREA.
- Regulators and supervisors who will consider this Opinion in the forthcoming comprehensive review of EBA Guidelines on the Supervisory Review and Evaluation Process (SREP).
Next Steps
To comply with or respond to this update, stakeholders should:
- Competent authorities: review P2R add-ons for double counting issues, considering offsets regarding “regulatory model deficiencies” only.
- Institutions bound by the output floor: inform their competent authority early of potential impacts and calculate P2R temporarily based on unfloored TREA to facilitate a smooth review process.
Any Other Relevant Information
The EBA’s efforts will continue to focus on clarifying interactions between different stacks, as well as interactions between P2R and the evolution of TREA in a wider manner. The Opinion will be considered in the forthcoming comprehensive review of the EBA Guidelines on the SREP, aligning with the report on the stacking order and capital buffers published in July 2024.
