Leverage ratio Pillar 2 guidance
The leverage ratio Pillar 2 guidance is a bank-specific recommendation that indicates the level of capital the ECB expects banks to maintain in addition to their binding leverage ratio requirements.
A bank’s leverage ratio is calculated by dividing its Tier 1 capital by its total leverage ratio exposure measure, which includes its assets and off-balance-sheet items, irrespective of how risky they are. The 3% leverage ratio requirement became binding for all banks on 28 June 2021.
The leverage ratio Pillar 2 guidance is determined as part of the Supervisory Review and Evaluation Process. Unlike the leverage ratio Pillar 2 requirement, it is not legally binding.
How do supervisors set the leverage ratio Pillar 2 guidance for individual banks?
ECB Banking Supervision sets the leverage ratio Pillar 2 guidance for individual banks based on their performance in the regular EU-wide stress tests using a two-step bucketing approach.
In Step 1, supervisors place the banks in one of four buckets according to the depletion of their leverage ratio in the stress test. Each bucket has a corresponding range of leverage ratio Pillar 2 guidance.
In Step 2, supervisors set the leverage ratio Pillar 2 guidance for some banks, for example if their projected leverage ratio falls below the overall leverage ratio requirement.
The overall leverage ratio requirement is the sum of the following:
- The 3% leverage ratio requirement applicable to all banks.
- The bank-specific leverage ratio Pillar 2 requirement determined by ECB Banking Supervision.
- The leverage ratio buffer for global systemically important institutions (leverage ratio G-SII buffer), which is 50% of the G-SII buffer determined by macroprudential authorities. For example, if a bank’s G-SII buffer is 1.5%, its leverage ratio G-SII buffer is 0.75%.
The leverage ratio Pillar 2 guidance is set within the range of the bucket the bank has been placed in, or in exceptional cases outside it, taking into account the bank’s individual circumstances, such as its risk profile and the year in which its leverage ratio reached its lowest point in the stress test.
Pillar 2 guidance range within each bucket (2023)
The bucketing approach establishes a clear link between leverage ratio Pillar 2 guidance levels and stress test results. However, as the graphic shows, the leverage ratio Pillar 2 guidance is not equal to the depletion in a bank’s leverage ratio. For example, a bank whose leverage ratio falls by 1.5 percentage points is placed in the second bucket and is therefore likely to have a leverage ratio Pillar 2 guidance of between 0.20% and 0.70%. As mentioned before, leverage ratio Pillar 2 guidance is set for some banks, for example if their projected leverage ratio falls below the overall leverage ratio requirement under stressed conditions.
For banks that are not part of the stress test, supervisors set the leverage ratio Pillar 2 guidance based on a forward-looking assessment of the potential impact of adverse scenarios on the leverage ratio.