How it works

The combined buffer requirement is the aggregate of several capital buffers that a bank must maintain in Common Equity Tier 1, in addition to its minimum own funds requirements and any Pillar 2 requirement. It is designed to build resilience in good times so that capital can be drawn down to absorb losses in stress without breaching the hard minimum.

The requirement combines the capital conservation buffer, which applies to all banks; the institution-specific countercyclical buffer, which varies with the credit cycle and the geographic distribution of exposures; and the systemic buffers, namely the global systemically important institution buffer, the other systemically important institution buffer and the systemic risk buffer. The interaction rules determine how the systemic buffers combine, in some cases taking the higher of overlapping requirements and in others adding them.

Because the combined buffer must be met with CET1 and sits on top of the minimum and Pillar 2 requirements, it establishes the level of CET1 below which distribution restrictions begin to apply. Breaching the buffer does not itself make a bank non-viable, but it triggers constraints on how much the bank may distribute.

The combined buffer requirement is established by the Capital Requirements Directive. Article 128 of the CRD defines the combined buffer requirement and its constituent buffers, and Articles 129 to 131 set out the capital conservation buffer, the countercyclical buffer and the buffers for systemically important institutions and systemic risk. The consequences of failing to meet the combined buffer, including the automatic restriction on distributions, are given effect through the maximum distributable amount in Article 141 of the CRD.

The buffers are expressed relative to the total risk exposure amount defined in Article 92(3) of the CRR and must be satisfied with CET1 that is not used to meet other requirements.

Practical relevance

For banks, the combined buffer requirement sets the effective operating level of capital. Management typically targets a comfortable margin above the top of the buffer stack, because falling into the buffer range triggers a capital conservation plan and restrictions on dividends, share buybacks and discretionary coupon payments.

For investors, the combined buffer requirement defines the maximum distributable amount trigger point. Holders of Additional Tier 1 instruments are especially sensitive to a bank's distance to the buffer, because a breach constrains discretionary coupons through the maximum distributable amount mechanism. Analysts monitor the buffer composition and the distance to it as a key gauge of both capital resilience and distribution risk.