What the concept describes
The overall capital requirement is supervisory terminology, used in the EBA's SREP framework, for the total amount of regulatory capital a bank is required to hold once the binding elements of the framework are added together. It comprises three layers: the Pillar 1 minimum own funds requirement, the institution-specific Pillar 2 requirement set through supervision, and the combined buffer requirement. It does not include Pillar 2 guidance, which is expected but not legally binding and sits above the overall capital requirement.
The concept is useful because the capital framework is built from separately defined pieces in different instruments. The overall capital requirement expresses, as a single figure, the capital a bank must maintain to be compliant, and it is against this stack that supervisors and analysts measure headroom, distribution capacity and distance to the point at which restrictions apply.
How it works in practice
The three components are met in a defined order of capital quality. The Pillar 1 minimum of 8% of the total risk exposure amount can be met partly with additional tier 1 and tier 2, but at least common equity tier 1 up to 4.5% and a total tier 1 of 6%. The Pillar 2 requirement is likewise met with a supervisory composition weighted towards CET1. The combined buffer requirement must be met entirely with common equity tier 1 and sits at the top of the stack.
The order matters because the same unit of CET1 cannot satisfy more than one requirement at once. As losses erode capital, CET1 is consumed from the top down: the combined buffer is breached first, triggering the maximum distributable amount, before the binding Pillar 2 requirement and Pillar 1 minimum are reached. The overall capital requirement is therefore the reference point for the stacking order and for judging when a bank moves from restriction to non-viability.
Legal basis
The overall capital requirement is not defined in a single legislative article; it is a composite of requirements set across the CRR and CRD and given operational meaning in EBA SREP guidelines. Its components are the Pillar 1 own funds requirement in the CRR, Article 92; the Pillar 2 requirement imposed under the CRD, Article 104 in the course of the supervisory review and evaluation process; and the combined buffer requirement in the CRD, Article 128. Pillar 2 guidance, which sits above the overall capital requirement, derives from the CRD, Article 104b.
Practical relevance for banks and investors
For banks, the overall capital requirement is the binding capital hurdle for compliance and for distribution decisions, since falling below the combined buffer within it engages the maximum distributable amount. For investors, it defines the capital a bank must hold before any headroom exists and, together with Pillar 2 guidance, frames the buffer to the maximum distributable amount trigger that is central to additional tier 1 coupon risk. It also anchors comparisons of capital adequacy across institutions and jurisdictions.