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.
SREP (Supervisory Review and Evaluation Process)The SREP is the annual review in which supervisors assess a bank's business model, governance, capital and liquidity risks. It ends with a decision setting the Pillar 2 requirement, Pillar 2 guidance, liquidity measures and qualitative measures. In the euro area the ECB runs it for significant banks.
ICAAP (Internal Capital Adequacy Assessment Process)The ICAAP is a bank's own process for identifying its material risks and assessing whether its internal capital is adequate to cover them now and under stress over a forward-looking horizon. It is required by Article 73 of the CRD and is a key input to the SREP.
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.
Capital buffersCapital 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.
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.
SREP (Supervisory Review and Evaluation Process)The SREP is the annual review in which supervisors assess a bank's business model, governance, capital and liquidity risks. It ends with a decision setting the Pillar 2 requirement, Pillar 2 guidance, liquidity measures and qualitative measures. In the euro area the ECB runs it for significant banks.
Risk-weighted assets (RWA)Risk-weighted assets measure a bank's exposures adjusted for risk: each exposure is multiplied by a risk weight that reflects its credit, operational or other risk. Capital ratios divide capital by RWA, so RWA also sets how much capital a bank must hold. Also called risk exposure amount.