How it works

Pillar 2 guidance (P2G) communicates the supervisor's expectation of how much capital a bank should hold above its binding requirements to withstand a severe but plausible stress scenario. It is derived largely from the outcome of supervisory stress tests: the projected capital depletion under the adverse scenario informs the amount by which a bank should exceed its minimum plus buffers. P2G is expressed as a common equity tier 1 expectation and sits at the very top of the capital stack — above the Pillar 1 minimum, the Pillar 2 requirement and the combined buffer requirement.

The defining feature of P2G is that it is non-binding. Breaching P2G does not by itself constitute a breach of capital requirements and, critically, does not trigger the maximum distributable amount restrictions. Instead, a bank operating below its P2G is expected to engage with its supervisor and agree measures to restore the guided level. Because P2G stacks above the combined buffer, capital held to meet it cannot be used to satisfy the buffer or the Pillar 2 requirement.

Relationship to P2R and the buffer

P2G is best understood alongside the Pillar 2 requirement (P2R). P2R is binding and addresses risks to the bank's current risk profile; P2G is guidance and addresses vulnerability to forward-looking stress. Both are outputs of the same SREP cycle. The separation was introduced so that the automatic distribution restrictions attached to the combined buffer and the MDA trigger would not be set off by the stress-based add-on, preserving the buffer's usability. This design deliberately keeps P2G outside the maximum-distributable-amount mechanics.

P2G rests on CRD Art. 104b, which frames it as guidance on additional own funds distinct from the binding requirement in CRD Art. 104a. It is set through the Supervisory Review and Evaluation Process under CRD Arts. 97–98. The European Banking Authority's SREP guidelines elaborate how supervisors calibrate P2G from stress-test results; those guidelines are supervisory guidance rather than directly binding law.

Relevance for resolution and loss absorption

As a going-concern expectation, P2G represents management buffer capital intended to absorb losses before a bank approaches non-viability. Unlike P2R, P2G does not feed directly into the MREL loss-absorption calibration, because resolution authorities generally anchor MREL to binding requirements rather than to guidance. Even so, P2G matters for resolvability: a bank that consistently operates near or below its P2G has thin headroom before stress erodes its buffers, shortening the runway supervisors have to deploy recovery options before the point of non-viability is reached and gone-concern loss absorption through bail-in becomes relevant.