EU banks’ journey towards an enhanced capital framework.
Date: 2020-06-10
Institutions: European Banking Authority
Subjects: banking policy, banking supervision, economic activity, financial regulation, financial requirements, financial transparency

EBA STAFF PAPER SERIES 

N. 3 – MARCH/2019 

EU BANKS’ JOURNEY 
TOWARDS AN ENHANCED 
CAPITAL FRAMEWORK 

by Alessandra Melis and Katrin Weissenberg 

The EBA Staff Papers Series describe research in progress by the author(s) and are published to elicit 
comments and to further debate. Any views expressed are solely those of the author(s) and so cannot be 
taken to represent those of the European Banking Authority (EBA) or to state EBA policy. Neither the EBA nor 
any person acting on its behalf may be held responsible for the use which may be made of the information 
contained in this publication, or for any errors which, despite careful preparation and checking, may appear. 

 
 
EU BANKS’ JOURNEY TOWARDS AN ENHANCED CAPITAL FRAMEWORK 

ABSTRACT 

This  paper  outlines  the  development  of  the  European  Pillar 2 
framework and EU banks’ capital positions since 2014. Motivated by 
concerns that have been raised over the years about excessive levels 
of  required  capital  imposed  on  EU  banks,  we  provide  empirical 
evidence on the positioning of EU banks’ capital levels relative to their 
requirements and expectations. Taking advantage of the information 
gathered  by  the  EBA  through  supervisory  reporting  and  a  unique 
dataset collected as part of the EBA’s policy work on Pillar 2 guidance, 
we  perform  a  descriptive  analysis  of  the  capital  margins  that  banks 
held in Q3 2017. We find that EU banks generally held ample margins 
of  capital  above  regulatory  requirements  and  expectations.  As 
expected,  we  observe  at  times  substantial  differences  across  banks 
and countries. 

KEYWORDS 

Pillar 2 Framework; capital requirements; P2R; P2G; capital levels; capital margins; capital composition; 
transparency  

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1.  Introduction 

Capital requirements imposed by regulators and supervisors on banks have increased in recent years at the global 
level and in Europe. This has led to substantial improvements in banks’ solvency positions, with average total 
capital ratios in Europe increasing from 16.2% to 18.8% between Q4 2014 and Q2 2018. As a result, the banking 
sector is overall more resilient and better equipped to withstand negative shocks. 

Nevertheless, some concerns have been raised that the required levels of capital may be excessive and pose an 
unjustified  burden  on  banks.  In  particular,  the  introduction  of  Basel III  at  the  global  level  and  the  common 
framework for the supervisory review and evaluation process (SREP) in Europe in 2014 (recently revised with the 
introduction of Pillar 2 guidance (P2G) as an additional capital expectation in Europe) have prompted questions 
on whether or not these additional safety nets may have unintended consequences for the banking sector and 
the economy as a whole. Many studies have been conducted over recent years on the impact of stricter capital 
regulation  on  economic  activity.  Among  the  unintended  consequences,  some  literature  suggests  that  higher 
capital requirements may lead to an at times substantial decrease in lending (at least in the short term) and, as 
a result, a decline in economic activity.1 

This paper aims to provide an overview of the specific regulatory developments observed across the European 
Union (EU) in recent years and banks’ progress in the context of tighter regulation. Based on supervisory data, 
we assess the capital positions of EU banks since 2014. In particular, we focus on capital levels and their relative 
positioning to capital requirements that were applicable in 2017, using a unique bank-level dataset on capital 
requirements. 

The  analysis  focuses  on  a  single  point  in  time  and  solely  on  the  developments  in  regulatory  and  supervisory 
capital requirements and reforms to date, without discussing the implications of any regulatory changes to be 
introduced going forward. We are mindful that further reforms may have important implications for the results. 
The output floor envisaged under Basel III from 2022, for instance, will have a potentially significant effect on the 
risk-weighted assets (RWAs) of banks using internal ratings-based models, and consequently capital ratios, but it 
does not feature in the present discussion. Nevertheless, we believe the analysis sheds some light on the impact 
of capital requirements on banks and may provide some indication on the likeliness of unintended consequences 
to date. 

The paper is structured as follows: section 2 provides an overview of the international standards and European 
Pillar 2  (SREP)  framework  and  its  developments;  section 3  describes  the  evolution  of  solvency  positions  at 
European  banks  over  recent  years  and  the  capital  margins  they  hold  above  their  regulatory  requirements, 
including  the  recently  rolled  out  concept  of  P2G;  and  section 4  includes  a  brief  discourse  into  transparency 
discussions related to the capital framework in the EU. 

1 See, for example, Bridges et al., 2015. While some support the idea that this effect may be explained by a negative impact 
of higher capital requirements on profitability (from an increase in the cost of financing due to more capital holding), 
another positive view is that more capital increases the monitoring effort of the bank and therefore its performance (see de 
Bandt et al., 2014). Some recent work looking at the negative impact of higher capital requirements on bank lending, and 
also gross domestic product (GDP) growth, has emphasised the positive effects that higher capital requirements may have 
because of the reduced risk of financial crises leading to adverse GDP events (tail risks). Over time, the welfare 
improvement from a reduced risk of financial crises may well exceed the loss from lower average bank lending. See Adrian 
et al., 2019. 

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2.  The European Pillar 2 Framework 

In what follows, we take a chronological approach to describing the development of the European Pillar 2 (P2) 
framework and the different capital requirements and expectations introduced: Pillar 2 requirements (P2R) and 
macroprudential capital buffers are described in section 2.2; and the recently rolled-out P2G is introduced in 
section 2.3. 

2.1 International Standards 

The global capital regulation known as Basel II Accord,2 as reviewed in 2004, created a structure of three pillars 
for strengthening the soundness and stability of the global banking system. 

The first pillar encompasses the minimum capital requirements applicable to all banks, setting out the rules by 
which  regulatory  capital  should  be  calculated  for  credit,  market  and  operational  risks.  P2,  which  defines  the 
supervisory review process, aims to ensure that — on top of the minimum requirements — each institution holds 
sufficient capital to protect it from the risk inherent in its specific business model and which is not covered or 
adequately covered by the minimum (Pillar 1) capital requirements. Potential P2 capital add-ons are aimed at 
creating a capital buffer in addition to banks’ minimum requirements, addressing inter alia risks that are not fully 
covered or are not considered at all under Pillar 1 (P1), and are based on supervisory review and assessment and 
banks’ own risk assessment of idiosyncratic characteristics. 

The third pillar complements the first and second pillars and requires banks to meet disclosure requirements 
related  to  the  scope  of  application,  capital,  risk  exposures,  risk  assessment  processes  and  hence  the  capital 
adequacy of an institution, to allow market participants to assess key pieces of information. 

The financial crisis that started in 2007 brought about an overall revision of the Basel II capital framework in all 
three areas, recognising weaknesses in certain areas of the existing framework, in particular in the definition of 
capital and explicit prudential capital buffers. By 2010, a new Basel III Accord3 had been developed. In the EU, 
the  CRD IV  package  (comprising  the  Capital  Requirements  Regulation  (CRR)  and  the  Capital  Requirements 
Directive (CRD)) came into force in 2013 as the European implementation of the new Basel rules. 

2.2 Implementation of international standards in the EU 

Prior to the CRD IV package, different practices existed across the EU. To increase capital levels, some Member 
States extended the powers of existing EU regulation when transposing it into national law, including different 
definitions of capital and capital add-ons imposed beyond P1. This so-called ‘gold plating’ of certain provisions 
of EU regulations at the national level not only impeded the level playing field of the single market, but could not 
sufficiently address the specific risks that individual banks were exposed to, it being applied to all banks within a 
jurisdiction. Under the Basel II framework, banks were expected to have adequate levels of capital reflecting not 
only the minimum set of common risk factors, but also their own idiosyncratic risks, stemming from their specific 
business models and markets. 

Furthermore, determining capitalisation levels based on banks’ own calculations (under P1) did not achieve the 
policy  objectives  set  by  regulators,  including  increasing  the  overall  level  of  capital  within  the  system  while 
ensuring a level playing field to a reasonable degree across banks. Experience over the years has demonstrated 
that the capability and appetite of institutions to carry out an objective assessment (on the risks that they face 

2 Basel Committee on Banking Supervision, 2004. 
3 Basel Committee on Banking Supervision, 2010. 

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EU BANKS’ JOURNEY TOWARDS AN ENHANCED CAPITAL FRAMEWORK 

and the capital that they should hold against those risks) are not always adequate from the perspectives of the 
sector and the economy as a whole. 

With a view to increasing the level of available capital, harmonising the various approaches and creating a level 
playing field in the spirit of Basel, risk-by-risk quantification of capital add-ons was implemented in the EU. The 
CRD transformed the broader global P2 concept into a requirement, rather than a buffer, to be quantified as an 
outcome of the SREP. The P2 capital requirement was introduced as an additional supervisory requirement but 
was set on a bank-by-bank basis, depending on each bank’s individual risk. 

In December 2014, the EBA published its guidelines on common procedures and methodologies for SREP. These 
aimed to provide more detailed guidance to European supervisors on assessing banks’ risks and risk management 
practices as part of P2. The SREP guidelines also included guidance on the application of P2R, outlining, inter alia, 
a risk-by-risk approach and defining the risks to be covered by P2R.4 

The P2 framework also defined the stacking order of various capital requirements, which is depicted in Figure 1 
below. P1 requirements and P2R form the legally binding part of capital requirements for European banks, also 
known  as  the  Total  SREP  Capital  Requirement  (TSCR),  given  the  quantification  of  P2R  through  the  SREP 
assessment.  The  binding  nature  of  the  TSCR  implies  that,  upon  breach,  a  bank  will  be  subject  to  specific 
supervisory intervention powers, including the potential withdrawal of authorisation.5 

In addition, banks are subject to a number of capital buffers of a macroprudential nature. The level of some of 
these buffers is defined explicitly in the legislation (e.g. the capital conservation buffer), while others are set 
individually by the respective macroprudential authorities. In contrast to P1 and P2 requirements, buffers by 
design can be breached under certain stressed conditions. However, banks are required to gradually rebuild their 
capital levels should they be temporarily unable to meet macroprudential buffers. Together with a bank’s TSCR, 
the combined buffer requirement (comprising the capital conservation buffer (CCB), the countercyclical buffer 
(CCyB),  the  systemic  risk  buffer  and  the  other  systematically  important  institution  (O-SII)  and  globally 
systematically  important  institution  (G-SII)  surcharges)  forms  the  overall  capital  requirement  (OCR)  (also  see 
Figure  1).  The  OCR  includes  very  important  metrics,  since  EU  legislation  links  banks’  freedom  to  distribute 
dividends, determine variable pay and determine payments on Additional Tier 1 (AT1) instruments to their ability 
to meet this ratio. The OCR acts as a trigger for calculating the maximum distributable amount (MDA).6  

2.3 Supervisory discussions and additional developments in 
the EU since 2014 

Notwithstanding  the  significant  convergence  of  supervisory  practices  in  the  area  of  P2  over  recent  years, 
exchange and discussions at the European level on this topic are ongoing. The original SREP guidelines did not 
sufficiently  harmonise  the  approach  to  determining  P2R  across  the  EU,  for  instance  concerning  the  use  of 
outcomes of supervisory stress tests when setting additional capital add-ons. P2R is intended to be neutral to 
the outcomes of supervisory stress tests and does not directly incorporate any capital shortfalls revealed by such 
outcomes. P2R is also intended to address unexpected (unstressed) losses over a 12-month period regarding 
risks not covered or not adequately covered by P1 requirements, in a similar fashion to the way in which P1 

4 CRD Article 107 provides the EBA with the mandate to draw up guidelines for competent authorities on the SREP (EBA, 
2014). 
5 In case of a breach of P1 plus P2R, competent authorities should consider additional intervention powers in accordance 
with Directives 2013/36/EU and 2014/59/EU, including the withdrawal of authorisation; and a breach of the TSCR should be 
considered when determining whether an institution is failing or likely to fail. See European Commission 2013b and 2014. 
6 According to Article 141 of the CRD, Member States should prohibit institutions that fail to meet or exceed their combined 
buffer requirement from distributing more than their MDA. The latter is calculated based on the quartile distance of the 
CET1 capital from the OCR and the institution’s distributable profits. See European Commission 2013b. 

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requirements are intended themselves. Therefore, the guidelines were still missing an element that explicitly 
addressed supervisory concerns in relation to the quantitative results of supervisory stress test outcomes, to also 
reflect concerns covering the next 3 years, under stress conditions. 

With this in mind, P2G was developed and rolled out in Europe in 2016 in such a way that P2, as applied in the 
EU, was split into a binding part and a non-binding part. P2G was one of the main elements added to the updated 
SREP guidelines issued in July 2018.7 

Figure 1: Stacking order of own funds requirements and P2G

MDA trigger

Pillar 2 Capital 
Guidance (P2G)  

Combined buffer 
requirement

Additional own funds 
requirements (P2R)    

Minimum own funds 
requirements (P1)

OCR –
Overall 
capital 
requirement 

TSCR -
Binding 
requirement 
to be met at 
all times

Figure 15 in the annex provides an overview of the timeline documenting when all the standards came into force.  

One of the main differences between P2R and P2G is that the latter is defined as a capital expectation that sits 
on  top  of  a  bank’s  combined  buffer  requirement  and  is  therefore  not  MDA  relevant.  It  is  to  be  met  fully  in 
Common Equity Tier 1 (CET1) and acts as an additional cushion to better protect banks’ TSCR under stressed 
conditions. Actual capital levels falling below P2G do not lead to any automatic supervisory reaction, but the 
latter  will  depend  on  the  circumstances  under  which  such  a  situation  occurs.  This  reflects  the  more  flexible, 
countercyclical characteristic of P2G, aimed at making banks better prepared for stressed conditions. 

Given this, P2G mirrors the more flexible nature of the Basel framework, in which the exact nature of P2 as a 
capital  instrument  is  not  explicitly  specified  but  which  provides  the  flexibility  to  use  P2  as  a  softer  buffer  or 
requirement. 

For the first time, in 2016, there was a possibility for supervisory authorities across the EU to use the results of 
the EU-wide stress test to set P2G. The maximum CET1 ratio decline during the worst year of stress is the starting 

7 EBA, 2018a. 

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EU BANKS’ JOURNEY TOWARDS AN ENHANCED CAPITAL FRAMEWORK 

point for the determination of P2G. As such, the concept of P2G is built around depletion amounts during the 
stress  scenarios,  rather  than  on  a  fixed  threshold  that  an  institution  needs  to  meet  throughout  the  stress 
scenario.8  It  is  worth  noting  that  the  results  of  supervisory  stress  tests  also  strongly  contribute  to  informing 
discussions with supervisors and individual banks, including relevant management actions (see below), such as 
how banks’ capital planning may be affected by the stress. 

Certain adjustments can be made to the quantitative stress test outcome to calibrate the final amount of capital 
guidance for each bank, which should be set fully in CET1. Adjustments are based on a broad set of institution 
specificities, such as balance sheet adjustments (given the existing constraints set by the static balance sheet 
assumption in some stress tests) or credible management mitigating actions. Other adjustments come from the 
full offsetting of the P2G against an institution’s CCB, as both concepts have the same objective (the conservation 
of capital in times of stress), and also the CCyB in exceptional cases. The adjustment process described above is 
depicted in Figure 2. 

Figure 2: Determination of P2G 

Adjustments*

Maximum 
Stress Test 
Impact (CET1 
ratio decline)

Capital 
Conservation 
Buffer (CCB)

Pillar 2 
Guidance 
(P2G)

* Such as credible mitigating management actions.

Note: The scale of the chart is indicative only, particularly in the context of Figure 1. 

While P2G is a significant step forward in regard to harmonising the way in which (quantitative) supervisory stress 
test results are incorporated into supervisory capital expectations of banks across the EU, its calibration arguably 
leaves  room  for  substantial  differences  in  treatments,  not  only  across  jurisdictions  but  also  across  banks. 
Furthermore, it may be argued that the merits of P2G are not always  clear  from the  outset; not  least in the 
context of the complexity it adds to the overall capital framework for banks, as well as the potential effects P2G 
may have on the markets. 

8 By definition of course the TSCR is a requirement to be met at all times. As such, it should be understood as a backstop for 
setting P2G: whenever the stress test depletion indicates a breach of the TSCR, P2G should be set in all cases. If the TSCR is 
not breached under the stress scenario, competent authorities may decide not to set P2G. 

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The explicit inclusion of stress test results in additional capital requirements has also recently been proposed in 
other jurisdictions (see Box 1). 

Box 1: P2G and the US Federal Reserve’s new concept of the stress capital buffer 

The concept behind P2G is in some ways comparable to the US Federal Reserve’s newly proposed stress capital 
buffer (SCB), which was announced during the summer of 2018. Both concepts provide quantitative guidance 
on  stress  test  results  and  are  calculated  based  on  the  largest  capital  (CET1)  decrease  during  an  adverse 
scenario (the severely adverse scenario in the case of the US Comprehensive Capital Analysis and Review — 
CCAR).9 

If enacted, the SCB will replace the CCB and will be floored at the fully phased-in level of the CCB (2.5%). This 
is similar to the offsetting of P2G against the CCB in the EU: any P2G smaller than 2.5% will be fully offset and 
just the CCB of 2.5% plus any other applicable combined buffer element applies (resembling the US floor of 
2.5% plus any other macroprudential buffers); in cases where P2G is larger than the CCB, the CCB plus any 
remaining P2G applies (resembling the SCB if the stress impact is larger than 2.5%). 

One difference between the US and the EU is that in the US the outcome is one single concept (the floored 
SCB) that captures the stress test results (net of the CCB), as well as the CCB, and upon breach of the SCB there 
would  be  regulatory  consequences  in  the  form  of  distribution  restrictions.  By  contrast,  in  the  EU  the  CCB 
remains a separate concept and the stress test results are added on top, in the form of an additional concept 
of ‘net’ P2G  (net because P2G accounts  for any double counting of the CCB and any adjustments through 
offsetting). Falling below P2G does not trigger automatic supervisory consequences. This may explain why, 
according to surveys, EU banks react less to stress test results than US banks.10 

3.  The evolution of European capital 

Levels 

3.1 Dataset 

The paper mainly builds on EBA supervisory reporting data, ensuring a consistent dataset across banks 
since 2014. Figures prior to 2014 — when EBA regular supervisory data became available — reflect 
data from ECB reports and the EBA Risk Dashboard. EBA stress-testing data are also used. 

In addition, this paper explores a unique dataset of capital requirements at the bank level, gathered 
by the EBA in 2017 as part of a survey for its policy work on P2. This allows an exploration of banks’ 
position (actual capital levels) relative to applicable minimum capital requirements. 

The P2 survey conducted by the EBA in 2017 was based on the sample of EBA reporting banks. The 
analysis in this paper looks at a subset of the original sample, created on the basis of criteria such as 
the availability of other data points needed for the analysis and the exclusion of outliers. The subset 

9 Calibrations for the SCB further take into account planned dividends. 
10 See Basel Committee on Banking Supervision, 2018. 

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consists of 146 banks from 29 countries for the TSCR and OCR margins, which represent just under 
80% of total EU banking assets. For the P2G margins, the analysis looks at 124 banks from 24 countries, 
representing 73% of EU banking sector assets. 

One drawback in the dataset used, and a limitation to the conclusions we can draw from it (but at the 
same time presenting a breeding ground for future analyses on the same topic), is the availability of 
data  for  only  one  point  in  time  for  banks’  capital  requirements.  A  longer  time  series  on  applicable 
capital requirements would allow a more comprehensive perspective on the evolution of banks’ actual 
capital levels over their capital requirements (to be explored below) and how these have developed in 
the context of changing capital requirements. This is not possible with the currently available data. 

3.2 EU banks’ capital levels since the crisis 

Capital levels in the EU have increased continuously since the crisis. Total capital (TC) ratios — that is, the sum of 
the capital held by a bank qualifying as Tier 1 (T1) and Tier 2 (T2) capital — increased from an EU average of 
11.7% in 2008 to 19% by Q3 2018.11 

Capital positions were fairly similar among different groups of bank sizes in Q3 2018, all around 19%. Medium-
sized banks show the largest increase over the period, by 21%, or 3.4 percentage points (ppts), to 19.2% in Q3 
2018, although they have been trending below the other groups, since Q4 2014, for a good part of the period. 
Average TC ratios for the group of small banks and for large banks stood at 19.3% and 18.9%, respectively, as of 
Q3  2018.  Large  banks  are  driving  the  EU  average  (see  Figure  3).  The  group  of  small  banks  saw  a  substantial 
increase to above 20% in its average TC ratio up until Q4 2016. This trend reversed somewhat in Q1 2017, but 
this group once again showed the largest increase during the last quarters. Until Q4 2017, the average EU TC 
continuously  increased  over  the  period,  with  a  small  dip  experienced  during  the  first  two  quarters  of  2018, 
though this reversed again in Q3 2018. The average TC ratio increased by 17.1%, or 2.8 ppts, between Q4 2014 
and Q3 2018. 

Figure 3 further provides an overview of the developments in P2-related regulation, guidance and supervisory 
exercises  since the crisis. While no particular pattern of an immediate increase in capital following a specific 
announcement or publication can be observed, two (not mutually exclusive) processes may arguably be behind 
EU banks’ improved solvency positions: on the one hand, the ongoing recapitalisation and de-risking at banks, 
partly boosted by recapitalisation exercises and stress tests; and, on the other, the new capital requirements and 
regulations that may have prompted banks to gradually adapt their internal capital planning. 

11 In this section, average capital ratios refer to weighted average capital ratios. 

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Figure 3: Capital developments in the EU 2008-2018 — TC ratios 

CRR/CRD IV a pply (Jan 
2014)

EBA SREP Gui delines 
a pply (Jan 2016)

EBA publishes Pi llar 2 
Roa dmap (Apr 2017)**

EBA 2014 Stres s Test
(Oct. 2014)

EBA publishes MDA 
Opi nion (Dec 2016)

EBA publishes SREP 
Gui delines (Dec 2014)

EBA 2016 Stres s Test 
(Jul  2016)

Ba s el III (Amendments) 
Agreement (Dec 2017)

+ 21.2% 
(3.4ppts)

+18.1% 
(2.9ppts)

+ 17.1% 
(2.8ppts)
+ 16.1% 
(2.6ppts)

CRR/CRD IV 
published 
(Jun 2013)

EBA Reca pitalisation 
Exerci s e
(Jul  2011) 

EU wide capital ratios*

22%

20%

18%

16%

14%

12%

10%

8%

2008 2009 2010 2011 2012 2013 2014

2015

2016

2017

2018

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

**P2G concept is introduced.

Large banks

Medium banks

Small banks

All banks

*First COREP quarterly reporting data in Q1 2014. Data taken from the ECB’s report EU Banking Sector Stability — August 
2009 and the EBA Risk Dashboard used for prior annual data points. 
Sources: ECB 2009, EBA 2018b, EBA COREP Reporting Data. 

Note: Weighted averages. Banks are classified by size class, according to their average total assets between December 2014 
and September 2018. Non-FINREP banks are assigned to the bucket of small banks. The sample varies over time because the 
samples of reporting banks change. 

To investigate how much the improved solvency positions are driven by de-risking versus actual capital increases, 
we performed an analysis on the total risk exposure amounts (TREAs) versus capital developments on a bank-by-
bank basis. Figure 4 shows that on a bank-by-bank basis the improvement is driven by both an increase in capital 
and a reduction in TREAs.12 An increase in CET1 capital is evident and quite consistent across EU banks (most 
data points are in the top quadrants). 

12 Note the samples in Figure 3 and Figure 4 are not exactly the same (due to reporting samples changing over time). 

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Figure 4: Evolution of TREAs and CET1 capital from Q4 2014 to Q3 2018 

Sources: EBA Supervisory Reporting. 
Note: The sample includes a subset of the wider sample of EBA reporting banks. The 143 observations included in this 
chart were selected based on the availability of the data. 

The increase in risk amounts observed in recent years (right-hand-side quadrants) has been partially driven by 
an increased use of macroprudential tools, in the form of national discretions and options, which may be applied 
on the basis of national circumstances. These tools allow Member States to request that banks modify the risk 
weights or risk parameters for some asset classes based on financial stability considerations (see Articles 124, 
164 and 458 of the CRR13). While all of these options and national discretions have been applied in the past years, 
not all of them are required to be included as a separate item in supervisory reporting. Article 458 of the CRR is 
so far the only one of the three tools for which supervisory reporting data are available. 

The use of Article 458 of the CRR is triggered by the identification, in one specific EU Member State, of changes 
in the intensity of macroprudential or systemic risk in the financial system that have the potential to have serious 
negative consequences for the financial system and for the real economy.14 This may then trigger the application 

13 Article 124 encompasses the possibility of applying higher risk weights (from 35% to 150%) on exposures secured by 
mortgages or immovable property on the basis of financial stability considerations; Article 164 permits competent 
authorities to make an upward revision to the minimum amounts, set by the CRR, for exposure weighted average loss given 
defaults for certain retail exposures secured by residential and commercial property, on the basis of financial stability 
considerations; Article 458 covers measures on, inter alia, risk weights for targeting asset bubbles in the residential and 
commercial property sector (if Articles 124 and 164 and macroprudential buffers cannot adequately address the risk 
identified). See European Commission, 2013a. 
14 Article 458(2) of the CRR. See European Commission, 2013a. 

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of  stricter  national  measures  on,  for  example,  risk  weights  for  targeting  asset  bubbles  in  the  residential  and 
commercial property sector (sometimes in the form of a floor or an add-on to the calculation of RWAs). 

Figure 5 below shows how the portion of aggregate TREAs in Europe, along with the number of banks, affected 
by the application of Article 458 changed over time. We can see some impact of macroprudential measures on 
TREAs, the former accounting for 0.18% of aggregate EU  TREAs in Q3  2018, up  from 0.05% in Q1 2014.  This 
appears to be a relatively limited impact, but it is still early days for countries’ application of these measures. In 
addition, data on macroprudential measures may be incomplete, as it is a relatively new reporting requirement. 
Nevertheless, as both the number of banks reporting — up from four banks in Q1 2014 to 11 banks in Q2 2018 
and 10 banks in Q3 2018 — and the amount of notifications provided to the EBA suggest, there has been an 
increase  in  the  use  of  this  measure.  Competent  authorities  are  becoming  ever  more  aware  of  the  need  to 
recognise potential changes in the level of macroprudential or systemic risk in the financial system, to prevent 
the build-up of excessive risks by institutions through macroprudential measures. 

Figure 5: Portion of EU TREAs for which stricter macroprudential requirements under Article 458 
CRR apply (percentages) and number of banks affected since Q1 2014 

Sources: EBA Risk Dashboard; EBA Supervisory Reporting. 

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3.3 EU banks’ margins above capital requirements 

EU banks’ choice of the actual level of capital ratios to hold depends on a number of aspects. While regulatory 
requirements are clearly a key driver, there are additional idiosyncratic factors that influence banks’ choice of 
internal  capital  ‘targets’.  A  number  of  idiosyncratic  elements  such  as  a  firm’s  strategy,  business  model, 
macroeconomic environment and aversion to risk are only some of the firm-specific factors taken into account 
when setting the internally desired (or ‘target’) capital ratio.15 

However, the increased attention paid to the evolution of capital regulation in Europe could have possibly led to 
a shift in the way banks set their capital targets, the voluntary margins they hold above supervisory expectations 
and the quality of capital they hold. 

Using a dataset of 146 banks from 28 EU countries plus Norway, we explore how  much banks’ capital levels 
actually sit above their capital requirements. In particular, we explore the margins above the TSCR and the OCR. 
Throughout this analysis, margins are calculated by using actual capital ratios in Q3 2017 and comparing them to 
capital requirements applicable as of Q1 2017, assuming that banks need about 6 to 9 months to adjust their 
target and actual capital levels following the communication of P2R.16 Throughout the paper, margins are defined 
as the ppt difference between actual capital ratios and required capital ratios. 

Box 2: Composition of capital requirements 

The analysis in this section focuses on banks’ ability to meet their total  capital requirements, as  shown in 
Figure 6, which replicates the stacking order presented in Figure 1 and also includes details on the size of some 
of the various capital requirements and buffers and the eligible capital for meeting such requirements. 

15 See De-Ramon et al., 2016. 
16 For some countries where the capital joint decision cycle implies that capital requirements change between Q1 and Q3 
2017, margins have been established for Q1 2017. This approach has also been followed for those countries where the 
cycle was not entirely clear. However, the banks for which this approach has been followed account for only around 13% of 
the sample. For confidentiality reasons, countries are presented in an anonymous way. 

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Figure 6: Capital requirements continued: capital quality in the stacking order 

*Note: We list all possible buffer elements. The final amount of the buffer and whether certain buffer elements 
are counted cumulatively or offset against each other is bank-specific and determined according to the CRD 
from Article 128 onwards. 
The scale is indicative only. 

Pursuant  to  Article 92  of  the  CRR,  the  8%  P1  own  funds  requirement  is  always  to  be  met  with  at  least  a 
minimum  T1  capital  of  6%,  of  which  at  least  75%  must  be  CET1  (i.e.  a  4.5%  minimum  P1  CET1  ratio  and 
consequently a maximum 1.5% AT1), plus 2% T2 capital. 

Similarly, the institution-specific P2R should also be met with at least 75% (analogous to the 6% of the 8% for 
P1) of T1 capital, of which again at least 75% (analogous to the 4.5% of the 6% for P1) should be met with CET1 
capital, while the institution-specific combined buffer and P2G are to be fully met in CET1. No double counting 
of  capital  towards  the  various  capital  requirements  is  allowed,  and  a  shortfall  of  lower  quality  capital 
instruments is to be filled with capital of better quality if available. This has been taken into account in our 
analysis below. 

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3.3.1 Total capital margins above the TSCR and the OCR 

EU banks in our sample generally held capital comfortably above their TSCR and OCR requirements in 2017. The 
weighted average EU margin for TC ratios above the TSCR was 8.9 ppts.17 As expected, at the country level the 
picture varies. Average country margins above the TSCR range between 3.6 ppts and 25.4 ppts. For TC margins 
above the OCR, the corresponding EU average is 6.7 ppts, while country averages range between 1.1 ppts and 
20.1 ppts. 

The  simple  average  TC  margins  above  the  TSCR  and  the  OCR  are  9.3 ppts  and  6.9 ppts,  respectively.  Not 
accounting for the size of the banks leads to somewhat higher EU averages, implying that larger banks tend to 
hold lower margins. At the country level, there are also cases where we observe that larger banks seem to hold 
higher margins (e.g. all countries for which simple averages are lower than weighted averages; see, for example, 
the country to the far left). 

Figure 7: EU banks’ margin above TC capital requirements, by country (Q3 2017) 

Percentage Points

30

25

20

15

10

5

0

EU average

Weighted Average - TC margin above the TSCR - Q3 2017 (ppts)

Weighted Average - TC margin above OCR - Q3 2017 (ppts)

Simple Average - TC margin above the TSCR - Q3 2017 (ppts)

Simple Average - TC margin above OCR - Q3 2017 (ppts)

Note: Weighted country averages represent average margins, weighted by banks’ assets within each country. Countries 
are sorted by the largest TC weighted average margin over the TSCR. 
The EU weighted average is the average of banks’ margins weighted by banks’ assets across the entire sample. 

17 Unless explicitly stated otherwise, in the following sections, the ‘average margin’ refers to the weighted average (by 
assets). 

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 3.3.2 CET1 margins above the TSCR and the OCR 

Since the global financial crisis, banks have been focusing in particular on the build-up of ‘higher’ quality capital, 
CET1. This is not surprising, considering the focus of the Basel III reform on capital of the highest quality and the 
choice to require banks to comply with several requirements and buffers exclusively holding CET1 instruments 
— such as the combined buffers or, as seen in some jurisdictions, to a large part, the P2R as well. 

Indeed, CET1 levels are on average well above the portion of the TSCR and the OCR to be held in CET1. Average 
margins for the EU are 7.6 ppts and 5.3 ppts for the TSCR (in CET1) and the OCR (in CET1), respectively. Average 
country margins range between 3.6 ppts and 24.9 ppts for margins above the TSCR and between 1.1 ppts and 
19.6 ppts for margins above the OCR. 

Again, for the EU as a whole, simple averages are slightly higher than weighted averages. The simple average 
CET1 margins above the TSCR are 8.4 ppts and 6.1 ppts, respectively. The fact that the difference between simple 
and weighted averages is higher for CET1 margins both across the TSCR and the OCR would suggest that smaller 
banks tend to hold more of their capital in CET1. At the country level, the picture is again mixed. 

Figure 8: EU banks’ margin above CET1 capital requirements by country (Q3 2017) 

Percentage Points

30

25

20

15

10

5

0

EU average

Weighted Average - CET1 margin above the CET1 TSCR - Q3 2017 (ppts)

Weighted Average - CET1 margin above CET1 OCR - Q3 2017 (ppts)

Simple Average - CET1 margin above the CET1 TSCR - Q3 2017 (ppts)

Simple Average - CET1 margin above CET1 OCR - Q3 2017 (ppts)

Note: weighted country averages present average margins, weighted by banks’ assets within each country. Countries are 
sorted by the largest CET1 weighted average margin over the TSCR. The EU weighted average is the average of banks’ 
margins weighted by banks’ assets across the entire sample. 

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When looking at bank-by-bank data, substantial heterogeneity is observable across banks. As of Q3 2017, one 
bank  in  our  sample  had  a  negative  margin  of  CET1  over  CET1  TSCR,  while  two  banks  hit  their  MDA  trigger 
(negative CET1 margins over their respective OCR in terms of CET1; see Figure 9). Negative margins were not 
major but still about 0.4 ppts for the TSCR and  0.2 ppts and almost 3 ppts for the OCR. The picture is the same 
for the number of banks falling below their TSCR and OCR in Q3 2017 in terms of TC.  

Figure 9: CET1 margins over OCR requirements by bank (as of Q3 2017)  

 3.3.3 Composition of capital held by banks 

Any shortfalls in AT1 and T2 are accounted for when calculating the ability to meet own funds requirements. This 
means,  in  cases  where  an  institution’s  AT1/T2  capital  levels  are  insufficient  to  meet  the  respective  AT1/T2 
requirements, CET1 capital is used to meet the P1 and P2 requirements of AT1 and T2, subsequently reducing 
the amount of CET1 available to be used for meeting the TSCR, the OCR and P2G. 

The composition of capital that banks hold determines whether there is a difference between the CET1 margins 
and the TC margins. The margins are the same whenever banks face an AT1/T2 18 or hold exactly the AT1/T2 
needed for meeting the respective requirement. However, the CET1 margins differ from TC margins when a bank 
holds more in AT1/T2 than the AT1/T2 amounts required.19 

Figure 10 shows that, for the majority of banks in our sample, the two margins are the same or very similar (that 
is, most banks lie on the 45-degree line or in close proximity). This confirms the picture provided in Figure 7 and 
Figure 8 where country averages of CET1 and TC margins were in many cases very similar or the same. This would 
suggest that most of the banks in our sample hold the majority of their capital in CET1. 

18 Either a shortfall in both AT1 and T2 or a shortfall in either AT1 or T2 only (depending on the corresponding levels of T2 
and AT1, respectively). Only a small portion of banks in our sample do not present AT1/T2 shortfalls, which means they do 
not have to make use of CET1 capital to ‘cover’ AT1/T2 shortages. 
19 This could be a surplus in both AT1 and T2, a surplus in T2 only or a surplus in AT1 only, which is greater than any 
potential T2 shortfall. 

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Figure 10: TC and CET1 margins above the TSCR  

35%

30%

25%

20%

15%

10%

5%

)
s
t
p
p
(
7
1
0
2

3
Q

-

R
C
S
T

e
h
t
e
v
o
b
a
n

i

g
r
a
m
C
T

45 degree line

-5%

0%

0%

5%

10%

15%

20%

25%

30%

35%

-5%

CET1 margin above the CET1 TSCR - Q3 2017 (ppts)

Further  analysis  on  shortfalls  of  AT1/T2  may  be  useful  going  forward  to  shed  light  on  banks’  internal  capital 
targets. In other words, it would be interesting to understand how banks factor the various tiers of capital of 
their respective regulatory requirements into their capital planning. 

3.4 Banks’ margins and P2G 

Finally, capital positions are compared with the newly introduced concept of P2G, measured again by the margin 
of institutions’ actual capital levels over their capital requirements and expectations. P2G has been the subject 
of some discussions by both banks and competent authorities. It is often argued that it presents yet another 
burden  on  institutions  in  an  ever-increasingly  regulated  environment  and  an  additional  complication  to  the 
already existing layers of capital requirements. 

For this analysis, the sample is smaller than for the analysis conducted in sections 3.3.1 and 3.3.2, as P2G had not 
yet been applied by all competent authorities in 2017.20 The new sample comprises 125 banks from 24 countries. 
In some jurisdictions, the P2G applicable in Q1 2017 was not based on quantitative stress test results. Therefore, 
P2G levels are not fully comparable. 

20 Note that the concept of P2G is applicable as of January 2019. 

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Figure 11: EU banks’ capital margins above P2G expectations (Q3 2017) 

Percentage Points

25

20

15

10

5

0

-5

EU average

Weighted Average - CET1 margin above OCR (in CET1) plus P2G - Q3 2017 (ppts)

Weighted Average - TC margin above OCR plus P2G - Q3 2017 (ppts)

Simple Average - CET1 margin above OCR (in CET1) plus P2G - Q3 2017 (ppts)

Simple Average - TC margin above OCR plus P2G - Q3 2017 (ppts)

Note: Weighted averages present country average margins weighted by banks’ assets within each country. Countries are sorted by the 
largest CET1 margin over P2G. Only includes countries where P2G has been applied. For countries where P2G has been applied only to 
some banks, banks to which no P2G has been applied are excluded from the weighted average. Where P2G has only been applied to one 
bank, the figure reflects that bank’s margin. The EU weighted average reflects the average of banks’ margins weighted by banks’ assets 
across the entire sample. 

The EU average of banks’ capital margins above their P2G expectations was at 3.2 ppts and 4.6 ppts for the CET1 
and TC margins, respectively, with more than one third of the countries in this new sample showing a distance 
greater than 4 ppts.21 The simple averages are again slightly higher at 4.1 ppts and 5 ppts, respectively, for the 
TC and CET1 margins. 

The fact that P2G is a capital expectation, and not a requirement, implies that falling below P2G triggers closer 
supervisory dialogue rather than automatic actions. It would appear that EU banks are generally well prepared 
for the new capital expectations, with actual capital levels as of Q3 2017 in most cases above institutions’ OCR 
plus P2G levels. 

However, 16 banks have TC levels below their P2G expectations, with the largest negative margin at 6.2 ppts, 
even though negative margins are less than 2 ppts in the vast majority of cases. Twenty-one banks also show a 
negative margin when looking at P2G expectations and actual capital levels in CET1 only (with the largest negative 

21 Discrepancies observed for some countries in the differences between the average TC margins and the average CET1 
margins across the OCR and the OCR plus P2G stem from the differences in samples for certain countries mentioned above. 

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margin at 6.2 ppts). This can be linked to the relative novelty of the concept, but it is also consistent with the less 
stringent nature of P2G. 

As with the margins above the TSCR and the OCR, no large differences are observed for simple averages versus 
weighted averages for the EU as a whole. Nevertheless, in several countries margins again look more favourable 
when not taking into account the size of the banks, implying that larger banks tend to have a lower margin over 
their P2G levels in several countries. 

The general picture observed at the EU level in the last sections suggests that the EU banking sector — on average 
— saw reasonable capital levels at the time to which the analysis refers. In addition, Figure 12 again demonstrates 
the heterogeneity observed across banks, with the top and bottom whiskers up to 32 ppts, apart from the P2G 
TC bar, implying that banks’ total capital margins above P2G expectations varied by up to 32 basis points across 
banks. 

Figure 12: Distribution of banks’ margins over various capital requirements 

Percentage 
points

35

30

25

20

15

10

5

0

-5

-10

CET1 margin -
TSCR

CET1 margin -
OCR

TC margin -
TSCR

TC margin -
OCR

CET1 margin -
OCR plus P2G

TC margin -
OCR plus P2G

q2

q3 Median

3.5 Margins and banks’ characteristics 

In the last step, our analysis investigates whether or not banks in the sample show any common characteristics 
that may explain any potential similar patterns in capital margins over requirements. 

First,  we  look  at  geography,  that  is  the  geographical  location  of  banks  in  the  sample,  sorted  by  their  margin 
level.22  From  Figure  13,  we  observe  that  banks  in  the  most  economically  distressed  countries  during  the 
European debt crisis (‘stressed countries’23) seem to have lower margins than banks in other EU jurisdictions. 

22 The margin of reference used for this analysis is the TC margin above the OCR, and the date of observation for the newly 
accounted variables was Q3 2017. 
23 The countries of Greece, Ireland, Italy, Portugal, Italy, Ireland, Greece and Spain. 

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This suggests that this group of banks might encounter challenges in increasing their levels of capital or might 
face higher capital requirements, or indeed a combination of the two. 

Figure 13: TC margin above the OCR (Q3 2017) ordered by country of origin  

Note: Sample averages present average margins, weighted by banks’ assets, consistent with previous charts. 

For the rest of the bank characteristics tested, we look at correlation coefficients. The purpose is not to show 
any  causal  relationships  and  what  share  of  the  margins  can  be  explained  by  individual  indicators,  but  to 
investigate whether banks with certain features are more or less likely to report higher or lower margins above 
capital requirements. 

The rest of the variables selected are characteristics for which literature or theory suggests certain implications 
for  capital  ratios.  We  look  at  size  (total  assets),  riskiness  (non-performing  loans  (NPLs),  RWAs  density), 
profitability (return on equity (ROE)) and business models (net gains on financial assets and liabilities held for 
trading/net interest income/net fee and commission income to total net operating income, mortgage volumes 
and the debt-to-equity ratio).24 

For instance, size is an indicator often associated with banks’ capital ratios.25 Some literature suggests a negative 
correlation between capital ratios and size, giving the following as possible explanations: the need for smaller 
banks to finance their long-term strategies with excess capital; the ability of larger banks to diversify and make 
use of better risk controls, therefore being able to afford holding lower capital ratios.26,27 In our analysis, the 
correlation  is  negative,  in  line  with  the  literature  —  even  though  the  coefficient  is  very  low.  In  addition,  the 

24 Our analysis acknowledges that both actual capital ratios and capital requirements are driving banks’ margins by 
definition.  
25 Francis and Osborne, 2012. 
26 Alfon et al., 2004; 2005. 
27 While it is true that larger banks may have better access to funding and are arguably in a better position to diversify, one 
may also expect a positive correlation between the size margin and capital margin: larger banks’ better access to capital 
markets may be used to maintain a higher ‘security buffer’ above their requirements. This would, in particular, spare them 
from an immediate need to recapitalise when new buffers or requirements are introduced or increased. 

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correlation between margins and profitability (tested through banks’ ROE) seems to be in line with some of the 
literature, showing a positive even though low correlation.28 

Correlation  coefficients  for  almost  all  of  the  tested  variables  are  in  the  area  of  0.2  and  below.  The  variables 
showing most correlation with the capital margins are NPL ratios and RWA density, that is, the variables selected 
to account for the riskiness of banks, as depicted in Figure 14.29 This result would suggest that — somehow in 
line  with  the  findings  of  the  country  of  origin  analysis  —  riskier  banks  in  our  sample  hold  lower  margins  on 
average.30 While the negative correlation for variables of riskiness may be driven by lower capital levels in riskier 
banks, possibly linked with the lower access and ability of these banks to raise additional capital, it could also be 
partially the result of higher capital requirements (or indeed higher RWAs) for riskier banks. 

Figure 14: Correlation between TC margin above the OCR (Q3 2017) and the NPL ratio (LHS) or RWA 
density (RHS)  

Sources: EBA Risk Dashboard; EBA Supervisory Reporting. 

Overall,  it  seems  that  for  our  sample  we  cannot  make  any  statements  regarding  certain  variables  and  bank 
characteristics  being  consistently  associated  with  banks  holding  higher  or  lower  margins  above  capital 
requirements. 

28 See Avisoa et al., 2018: the background may come from an observation of cases in which, during the sovereign crisis, 
banks that were more constrained by capital requirements were likely to have less favourable market financing conditions 
and therefore be less able to seize investment opportunities and hence less profitable. 
29 However, the correlation is relatively weak. For NPLs, we find a correlation coefficient of -0.3. The highest correlation we 
find is between capital margins and the RWA density, with a correlation coefficient of -0.4. 
30 RWAs also directly affect margins. 

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4.  Transparency and disclosure — a short 

discourse 

Discussions on P2 capital requirements and expectations always prominently feature the topic of transparency 
and disclosure. 

Disclosure in the context of P2R comes with a set of benefits and potential drawbacks. These are mainly related 
to the relevance of P2R for institutions’ MDA triggers and therefore for a range of capital instruments held by 
investors in the market. On the one hand, some have argued in favour of some caution in disclosing P2R, since 
this information may potentially determine self-re-enforcing, adverse effects: levels of capital too close to the 
MDA trigger may for example trigger reactions on the (AT1) market, which could indeed be self-fulfilling. 

On  the  other  hand,  disclosure  allows  for  more  complete  information  access  to  investors  and  would  enable 
market participants to assess and price capital instruments issued by banks. It would reduce information bias in 
the  market  and,  in  this  way,  promote  market  discipline,  leading  to  increased  levels  of  confidence  overall. 
Disclosure  and  transparency  of  P2R  (i.e.  the  TSCR  and  the  OCR)  can  also  arguably  contribute  to  preventing 
another liquidity crisis, as seen during the financial crisis, where uncertainty was more harmful than bad news 
itself.31 

The topic of transparency has attracted a lot of attention, also within the context of P2G, even though its non-
binding nature may call for somewhat different considerations. No automatic supervisory action will follow in 
instances where an institution falls below its P2G expectation and, since P2G is not MDA relevant, there will be 
no automatic restrictions and no automatic consequences  for investors  if a bank falls below P2G. Many may 
argue that there is a danger of self-fulfilling investor reactions to capital expectations that are intended only as 
an additional buffer to existing requirements. At the same time, with the progress made today on bail-in regimes 
and banks’ safety, full transparency — in the form of publishing supervisory capital expectations (P2G) alongside 
the  stress  test  results  on  which  they  are  based  —  would  arguably  allow  investors  to  access  all  relevant 
information.32 

Currently,  no  prescribed  way  of  disclosing  P2G  exists  across  Europe,  and  it  is  likely  that  this  will  be  handled 
differently across jurisdictions, as is the case for P2R. 33 

31 Enria, A., 2016. 
32 Enria, A., 2018. 
33As this paper is being drafted, a proposal on the amendments of the current CRD IV package is being discussed by the 
European Parliament, the Council and the Commission in trilogue. The amendments would implement some of the recent 
international regulatory standards for banks, as set out in the Basel III framework. Among the proposed adjustments, the 
proposal may include a requirement for banks to disclose their P2R. 

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5.  Conclusion 

Capital regulation and the P2 framework in particular have undergone substantial changes over recent years in 
Europe. The most recent introduction of new international standards has led to not only harmonisation across 
Member  States,  but  also  greater  challenges  for  EU  banks  through  additional  capital  requirements  and 
expectations and a perceived decrease in performance. 

This  paper  shows  that  European  banks’  capital  levels,  with  a  few  exceptions,  sat  well  above  their  capital 
requirements in 2017. For the CET1 TSCR requirements, no country saw an average margin below 3 ppts. On 
average, in Q3 2017 EU banks’ capital stood at 5.3 ppts above the level at which MDA restrictions would have 
been triggered, that is, above their respective OCR in CET1 terms. The average margin above the CET1 OCR was 
below 3 ppts in only five countries and was always positive. Furthermore, EU banks’ margins are also generally 
comfortably above the newly introduced capital expectations (P2G). 

This paper acknowledges that banks’ choice of capital levels is not only related to capital requirements: European 
banks may be holding capital levels well above requirements because their internal target capital ratio is higher 
than the regulatory requirements or because of other idiosyncratic factors. 

While  our  analysis  suggests  that  EU  banks  with  their  current  margins  are  generally  well  positioned  for  the 
enhanced capital framework that has been established in Europe to date, to establish an actual link between 
capital ratios (and capital targets) and supervisory requirements,  we  would need a longer time series on the 
latter.34 What we can say, nevertheless, is that the enhanced capital framework introduced in Europe does not 
appear to have posed an immediate constraint on banks’ capital in 2017 for the majority of banks included in our 
sample. This could be either because banks have already increased capital levels sufficiently over recent years, 
or because requirements have not been as biting as anticipated. 

Finally, supervisory expectations are evolving and may change. Future changes in regulation to fully implement 
the latest Basel III developments35 may also imply additional changes to banks’ capital requirements and margins 
in the future. 

34 In a second step, with a longer time series available on capital requirements, it would be interesting to not only explore 
the extent to which capital margins have actually been driven by capital requirements (that is, to what extent capital levels 
and targets have responded to requirements), but also study the developments of capital requirements and lending activity 
over time. 
35 Basel Committee on Banking Supervision, 2017. 

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6.  Annex 

Figure 15: Capital requirements, expectations and buffers: timeline 

Macroprudential buffers (CRD)

G-SII (1-3.5%)/O-SII8 (ma x 2%)

Sys temi c ri s k buffer (SRB)* (1-3%)

CCB mi n 0.625%
CCyB ma x 0.625%

CCB mi n 1.25%
CCyB ma x 1.25%

CCB mi n 1.875%
CCyB ma x 1.875%

CCB mi n 2.5%
CCyB ma x 2.5%

Pillar 2 capital 
requirements/guidance

P1 minimum requirements
(Basel III)

P2G  starts being rolled out - applied 
already by several jurisdictions in the 
2016 stress test.

P2R applies

P2G applies for all

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Relevant Level 1/Level 2 text

CRR/CRD IV comes into force

SREP GLs apply

Revised SREP GLs apply

Revised SREP GLs developed and 
published (Jul 2018)

Note: Specific rules apply on the SRB, O-SIFI and G-SIFI, including their cumulative nature (see CRD IV, 
Article 131 onwards).  

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7.  References 

Adrian,  T.,  Boyarchenko,  N.,  and  Giannone,  D.,  2019,  ‘Vulnerable  growth’,  American  Economic  Review, 
forthcoming. 

Alfon, I., Argimon, I. and Bascunana-ambros, P. (2004, What determines how much capital is held by UK banks 
and building societies?, Financial Services Authority Occasional Paper No 22. 

Alfon, I., Argimon, I. and Bascunana-Ambros, P. (2005), ‘How individual capital requirements affect capital ratios 
in UK banks and building societies’, Documentos de Trabajo N.º 0515, Banco de España. 

Avisoa,  E.,  Camara,  B.,  Frappa,  S.,  Toader,  O.  2018,  Banks’  business  models  and  performance:  the  impact  of 
interest rates and capital requirements, 2018 EBA Policy Research Workshop. 

Basel Committee on Banking Supervision, 2004, International convergence of capital measurement and capital 
standards: 
framework, 
Switzerland 
(https://www.bis.org/publ/bcbs107.pdf). 

International 

Settlements, 

revised 

Basel, 

Bank 

for 

a 

Basel Committee on Banking Supervision, 2010, Basel III: A global regulatory framework for more resilient banks 
and 
Switzerland 
Bank 
(https://www.bis.org/publ/bcbs189.pdf). 

International 

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systems, 

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EU BANKS’ JOURNEY TOWARDS AN ENHANCED CAPITAL FRAMEWORK 

ACKNOWLEDGEMENTS 

The authors are affiliated with the European Banking Authority (EBA). The views 
expressed  are  those  of  the  authors  and  do  not  necessarily  reflect  official 
positions of the EBA. 

The authors are grateful for the valuable input from and discussions with Mario 
Quagliariello (EBA), as well as the useful comments from Andrea Resti (Bocconi 
University),  Stefan  Hohl  (Financial  Stability  Institute),  and  Olli  Castrén,  Piers 
Haben, Angel Monzon and Oleg Shmeljov (EBA). 

Alessandra Melis  
Junior Bank Sector Analyst, Risk Analysis and Stress Testing, EBA 

Katrin Weissenberg:  
Junior Bank Expert, Economic Analysis and Impact Assessment, EBA 

EUROPEAN BANKING AUTHORITY 

Floor 46 One Canada Square, 
London E145AA 

Tel.  +44 (0)207 382 1776 
Fax: +44 (0)207 382 1771 
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http://www.eba.europa.eu 

ISBN 978-92-9245-501-9 
ISSN 2599-7831 

DOI:10.2853/0746 
DZ-AH-19-001-EN-N 

© European Banking Authority, 2019. 

Any reproduction, publication and reprint in the form of a different publication, whether printed or 
produced electronically, in whole or in part, is permitted, provided the source is acknowledged. 
Where copyright vests in a third party, permission for reproduction must be sought directly from the 
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This paper exists in English only and it can be downloaded without charge from 
https://eba.europa.eu/about-us/staff-papers, where information on the EBA Staff Paper Series can 
also be found. 

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