Capital buffers are CET1 requirements on top of the Pillar 1 and Pillar 2 minimums: the capital conservation buffer, the countercyclical buffer, and buffers for systemic banks and systemic risk. Together they form the combined buffer requirement. A bank that uses them faces limits on distributions.
CET1 (Common Equity Tier 1)Common Equity Tier 1 is the highest quality layer of a bank's own funds: ordinary shares, share premium, retained earnings and other reserves, minus regulatory deductions. The CET1 ratio divides it by risk-weighted assets and must be at least 4.5% under the CRR, before buffers and Pillar 2.
Maximum distributable amount (MDA)The maximum distributable amount caps dividends, variable pay and AT1 coupons when a bank does not meet its combined buffer requirement. The further capital falls into the buffers, the lower the share of profits that can be paid out. The MDA trigger is closely watched by AT1 investors.
G-SIB and O-SII (systemically important banks)Global systemically important banks (G-SIBs) are banks whose failure would threaten the world financial system, listed yearly by the FSB. Other systemically important institutions (O-SIIs) are identified nationally in the EU. Both carry extra capital buffers, and G-SIBs must also meet TLAC.
Pillar 2 (P2R and P2G)Pillar 2 covers risks not captured, or not fully captured, by Pillar 1. Supervisors set a binding Pillar 2 requirement (P2R) after the SREP, and a non-binding Pillar 2 guidance (P2G) informed by stress tests. Both are expressed as a share of risk-weighted assets.
CET1 (Common Equity Tier 1)Common Equity Tier 1 is the highest quality layer of a bank's own funds: ordinary shares, share premium, retained earnings and other reserves, minus regulatory deductions. The CET1 ratio divides it by risk-weighted assets and must be at least 4.5% under the CRR, before buffers and Pillar 2.
Pillar 1 (minimum capital requirements)Pillar 1 is the part of the Basel framework that sets minimum capital requirements for credit risk, operational risk and other risks with prescribed methods. In the EU the minimums are 4.5% CET1, 6% Tier 1 and 8% total capital as a share of risk-weighted assets.
Pillar 2 (P2R and P2G)Pillar 2 covers risks not captured, or not fully captured, by Pillar 1. Supervisors set a binding Pillar 2 requirement (P2R) after the SREP, and a non-binding Pillar 2 guidance (P2G) informed by stress tests. Both are expressed as a share of risk-weighted assets.