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Pillar 2 guidance

The 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 capital requirements to ensure they can absorb potential losses resulting from adverse scenarios.

The Pillar 2 guidance is set as part of the Supervisory Review and Evaluation Process. Unlike the Pillar 2 requirement, it is not legally binding. It also does not encompass the risk of excessive leverage, which is covered by the leverage ratio Pillar 2 guidance.

How do supervisors set the Pillar 2 guidance for individual banks?

The level of the Pillar 2 guidance for each bank is based on how it performs in the regular EU-wide stress tests, which examine the impact of an economic shock on banks’ capital ratios (i.e. their level of capital relative to their risk-weighted assets).

Since 2021 ECB Banking Supervision has used a two-step bucketing approach to set the Pillar 2 guidance for individual banks. This approach ensures a level playing field, improves consistency and takes into account banks’ specific circumstances, while remaining simple in its design.

Step 1

In Step 1, supervisors place banks in one of four buckets according to the depletion of their capital ratios in the stress test. Each bucket has a corresponding range of Pillar 2 guidance that overlaps with neighbouring buckets to avoid cliff effects.

Step 2

In Step 2, supervisors set the Pillar 2 guidance for each bank within the range of the bucket, 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 capital ratio reached its lowest point during the stress test. This ensures the process remains bank-specific while also delivering reasonable Pillar 2 guidance for banks with very high capital ratio depletion.

Pillar 2 guidance range within each bucket (2023)

* Maximum Pillar 2 guidance is not capped.
Note: P2G stands for Pillar 2 guidance.

Source: ECB Banking Supervision

The bucketing approach establishes a clear link between Pillar 2 guidance levels and stress test results. However, as the graphic shows, the Pillar 2 guidance is not equal to the depletion in a bank’s capital ratio. For example, a bank whose capital ratio falls by 8 percentage-points is placed in the third bucket and therefore likely to have a Pillar 2 guidance of no more than 2.75%.

The buckets and corresponding Pillar 2 guidance ranges have not changed since 2021.

For banks that are not part of the stress test, supervisors set the Pillar 2 guidance based on a forward-looking assessment of the bank’s resilience and the potential impact of adverse scenarios on its solvency.