Publication of Finanstilsynet's decision on Pillar 2 requirements for individual banks
Published: 28 June 2017
Last updated: 11 February 2020
Finanstilsynet regularly performs reviews of institutions' risks and capital needs (SREP). The reviews are based on the premise that institutions must maintain capital over and above the minimum requirement and buffer requirements for risks to which the institution is exposed and which are not, or are only partially, covered by the minimum requirement under Pillar 1 (Pillar 2 requirements). The Pillar 2 requirement shall be covered by common equity tier 1 (CET1) capital.
The provisions regulating the supervisory authorities' evaluation of institutions' risk and capital assessment process and their assessment of institutions' liquidity and funding risk are set out in CRD IV in Article 97 and 98. The government authorities' use of supervisory measures and powers is dealt with in the CRD IV in Article 103 and 104. These provisions are transposed in the Financial Institutions Act section 13-6 on assessment of risk and overall need for capital, subsection (7), and in section 14-6 on supervisory follow-up, rectification and orders.
Requirements on liquidity management, liquidity reserves and stable funding are transposed in the Financial Institutions Act section 13-7.
The Pillar 2 requirement is in addition to the following minimum requirements and buffer requirements:
- The minimum requirement under Pillar 1 of 8 per cent of risk-weighted assets, including at least 4.5 per cent CET1 capital and 6 per cent tier 1 capital under applicable capital adequacy rules, and
- An overall buffer consisting of CET1 capital to cover the sum of buffer requirements under Pillar 1 that are in effect at any and all times.
The Pillar 2 requirement is set based on an overall discretionary assessment supported by Finanstilsynet's methodology set out in circular no. 12/2016, which describes the main elements of Finanstilsynet's methods for assessing institutions' overall risk level and appurtenant capital needs (SREP). Finanstilsynet's methods for determining Pillar 2 requirements are based inter alia on guidelines given by the European Banking Authority, published in December 2014, and clarifications made by the Ministry of Finance by letter of 17 March 2016 to Finanstilsynet.
Against the background of Finanstilsynet's SREP evaluation and any comments from the institution concerned, Finanstilsynet sets a Pillar 2 requirement with a basis in the Financial Institutions Act section 13-6, subsection (7), second sentence (delegated to Finanstilsynet).
The institution may appeal against the decision within three weeks of receiving it. Any appeal should be directed to Finanstilsynet. The appeals body is the Ministry of Finance.
If overall CET1 capital falls below the sum of the minimum requirement, the Pillar 2 requirement and the overall buffer requirements, the institution must alert Finanstilsynet immediately and thereafter present a plan for restoring compliance with the overall capital requirement; see the Financial Institutions Act section 14-6. The same applies if tier 1 capital adequacy falls below the tier 1 capital adequacy requirement or total own funds fall below the own funds requirement. Depending on the planned measures presented by the bank, Finanstilsynet will consider what action to take. Finanstilsynet is empowered to order restrictions on the scope of performance related remuneration, dividend payouts or interest payable on tier 1 capital. In the event of restrictions on payouts of dividend, interest on hybrid capital and variable remuneration, Finanstilsynet will, based on equity capital's and hybrid capital's different priority with regard to coverage of losses, ensure that interest payments on hybrid capital have priority over variable remuneration and dividends under the provisions of the Financial Institutions Act section 14-6, subsection (3)(f) and (g).
Finanstilsynet expects institutions to adjust their capitalisation to ensure an ample margin to the overall CET1 capital requirement. Institutions must assess their capital needs in a forward-looking perspective. The board of directors of the particular institution should give due weight to the room for manoeuvre needed to ensure that normal lending activity can be maintained during downturns and that capitalisation supports access to capital markets under difficult market conditions.