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European Banking Authority Pillar 2 update

European Banking Authority Pillar 2 update

Michelle Adcock

Banking prudential, EMA FS Risk & Regulatory Insight Centre

KPMG in the UK


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The European Banking Authority (EBA) has outlined its plans for updating the common European framework for the supervisory review and evaluation process (SREP) (PDF 277KB).The intention is to consult on the revisions in the second half of 2017, and to implement the changes in 2018.

The drivers for change include the latest EU and international standards, the promotion of best supervisory practice, and addressing issues identified in the EBA’s work on supervisory convergence.

The roadmap explains the approach the EBA will take for the revision of the SREP guidelines, the revision of the interest rate risk in the banking book (IRRBB) guidelines and the finalisation of the stress testing guidelines for banks.

SREP Guidelines

The main proposed revision to the SREP Guidelines covers the link between supervisory stress tests and the setting of Pillar 2 capital guidance (P2G). The revision will specify that P2G should be set on the basis of the outcome of supervisory stress tests under an adverse scenario, so that a bank holds sufficient overall common equity tier 1 (CET1) capital to enable it to meet its minimum CET1 capital requirement (the Basel III minimum of 4.5 percent, plus any G-SIB, D-SIB or other systemic risk buffers) post-stress. P2G would take into account the availability of the conservation and countercyclical capital buffers and of (some) management actions for absorbing the adverse impact of the stress test.

The SREP Guidelines will also be revised to reflect:

  • Additional details on the supervisory assessment of banks’ stress testing (see below);
  • Consistency with recently published EBA guidance on internal governance;
  • Clarifying the differences between risks and viability scores, interactions between the four main elements of the SREP, and communication of total SREP capital requirements (TSCR) and overall capital requirements (OCR) to banks; and
  • Possible additional revisions on business model analysis and technical guidance on ICAAP/ILAAP linkages and their assessment criteria to keep them in line with market developments.

IRRBB Guidelines

The revisions here will reflect the latest Basel Committee standards on IRRBB, including:

  • Clarification of definitions and expanding the scope of the guidelines to include credit spread risk in the banking book;
  • Updating the parameters and assumptions of the supervisory standard shock;
  • Updating the standardised interest rate shock scenarios; and
  • Updating the requirements on internal governance arrangements.

The implementation of these revised guidelines should coincide with the 2018 implementation date for the revised Basel Committee standards. Thereafter, the EBA will start working on technical standards based on mandates introduced in the revised CRR2/CRD5, including the methodology for the standardised framework, supervisory shock scenarios (including common modelling and parametric assumptions), and common modelling and parametric assumptions for disclosure purposes.

Stress Testing Guidelines

Following its earlier consultation in 2016, the EBA intends to finalise its Stress Testing Guidelines. All aspects relating to the supervisory assessment of banks’ own stress testing, supervisory stress testing and the use of the quantitative outcomes of stress testing will then be incorporated into the SREP Guidelines.

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