The European Banking Authority (EBA) published an Opinion on how the Basel output floor should interact with Pillar 2 requirements (P2R) under the Capital Requirements Directive framework. It concludes that an institution’s nominal P2R amount should not increase solely because it becomes bound by the output floor, and it highlights the risk of double counting where P2R captures risks already reflected through a binding output floor. The Opinion sets out a temporary approach for institutions that first become bound by the output floor, under which P2R should be calculated using the unfloored total risk exposure amount (TREA), applying the P2R percentage communicated following the last supervisory review and evaluation process (SREP) cycle. Institutions are expected to inform their competent authority early about the potential impact to support the review process. In assessing possible double counting, competent authorities are expected to consider offsets only for P2R add-ons linked to regulatory model deficiencies, and authorities that calculate P2R as a multiplication by TREA are advised to prevent undue arithmetic effects from the output floor in that review. The EBA will take the Opinion into account in its forthcoming comprehensive review of the EBA Guidelines on the SREP, alongside further work to clarify interactions between capital “stacks” and between P2R and changes in TREA.
European Banking Authority 2025-01-21
European Banking Authority issues Opinion that the output floor should not mechanically increase Pillar 2 requirements
The European Banking Authority (EBA) issued an Opinion on the interaction between the Basel output floor and Pillar 2 requirements (P2R) under the Capital Requirements Directive. It advises that P2R should not increase solely due to the output floor and highlights the risk of double counting. The EBA will incorporate this Opinion in its upcoming review of the EBA Guidelines on the Supervisory Review and Evaluation Process (SREP).