Germany’s Federal Financial Supervisory Authority has detailed the methodology and process for setting own funds recommendations, or Pillar 2 Guidance, following the 2026 stress test for less significant institutions. Additional capital will generally be recommended only when an institution’s total capital, Tier 1 capital or Common Equity Tier 1 capital ratio under the adverse scenario falls below its Total SREP Capital Requirement plus a 500 basis point buffer. This formalizes the more risk based approach announced with the stress test results, which is expected to reduce the number of institutions receiving recommendations by about 40%. Institutions shown in the stress test return as having indicative guidance of zero will generally receive no separate letter, and that outcome takes effect from Dec. 1 of the stress test year, subject to corrections for material data errors or other findings. For other institutions, BaFin will multiply capital depletion under the adverse scenario by a calibration factor, set at 65% for 2026 and recalibrated for each future stress test. Gross guidance is capped at 1,000 basis points and offset against the 2.5% capital conservation buffer, producing maximum net guidance of 750 basis points. Institutions with indicative guidance above zero will receive a letter, including where the buffer offset ultimately reduces net guidance to zero. The methodology applies to entities within Section 6d(1) of the German Banking Act and remains valid through Aug. 30, 2028. BaFin expects to transfer the approach into a circular if the supervisory practice becomes established and is not superseded by legislation.

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