The European Banking Authority (EBA) today published an Opinion on the interaction between the output floor and Pillar 2 Requirements (P2R) in the context of the mandate set forth in the Capital Requirements Directive (CRD). The Opinion considers that the nominal amount of P2R is not to increase as a result of an institution becoming bound by the output floor and highlights the possibility of double counting in setting the P2R of risks already covered by the effects of a binding output floor.

Today’s Opinion describes how P2R  is to be calculated temporarily based on the unfloored, instead of floored, total risk exposure amount (TREA) when an institution first becomes bound by the output floor, applying the P2R percentage previously communicated following the last supervisory review and evaluation process (SREP) cycle.  The Opinion emphasises the importance of institutions informing early their competent authority of the potential impact so as to facilitate the review process.

The EBA expects competent authorities in their review on double counting of risks to only consider offsets regarding P2R add-ons in relation to “regulatory model deficiencies”. Furthermore, the EBA advises competent authorities using a methodology that calculates P2R amount based on a multiplication by TREA, to consider how they could ward off undue arithmetic effects from the output floor in the review on double counting.

The Opinion will be considered in the forthcoming comprehensive review of the EBA Guidelines on the SREP. Generally, and in line with what was highlighted in the July 2024 Report on the stacking order and capital buffers, the EBA’s efforts will continue to focus on clarifying, where necessary, the interactions of the different stacks, as well as interactions between P2R and the evolution of TREA in a wider manner.