ECB Pillar 2 Benchmarking Study

Financial institutions are required to hold capital to protect against the risks and financial shocks they are exposed to on a day-to-day basis, with the Basel Accord laying out three pillars which apply to banks to ensure sufficient capitalization and prudent risk-taking. 

These are Pillar 1, a set of minimum capital requirements; Pillar 2, a firm-specific capital requirement supplementing Pillar 1 to account for idiosyncratic or portfolio-specific risks subject to supervisory review; and Pillar 3, the use of public disclosures to strengthen market discipline and encourage sound practices.

As the capital framework for banks transitions to CRR3 (e.g. the transposition of Basel 3 in Europe), there are concerns around potential overlap, or double counting, of risks between Pillar 1 and Pillar 2 requirements. Another concern is the need to “re-baseline” Pillar 2 requirements. Because Pillar 2 requirements are set as a percentage of risk-weighted assets, any change to risk-weighted assets resulting from CRR3 will mechanistically feed into Pillar 2 requirements.

To examine these issues, GARP Benchmarking Initiative (GBI)^®, in conjunction with the Association for Financial Markets Europe (AFME), conducted a data-driven benchmarking study working with a sample of eight banking entities supervised by the European Central Bank.

Findings show that transitioning to CRR3 will result in a mechanistic increase in EUR 6.3bn of Pillar 2 requirements capital and EUR 4bn of Pillar 2 guidance capital, as well as an overlap of 6.9% of existing Pillar 2 requirements with new CRR3 Pillar 1 requirements.  

About the author

Katherine Wolicki is the Global Head of Engagement and Outreach at GARP Benchmarking Initiative (GBI). GBI plays a key role in supporting evidence-based policymaking through the provision of industry benchmarking studies. Prior to this she was with HSBC for 12 years where she led the global financial and model risk regulatory policy and engagement team for risk.