How it works

The Pillar 2 requirement (P2R) is an institution-specific capital requirement that a supervisor imposes on top of the harmonised Pillar 1 minimum. Pillar 1 sets a uniform 8% own funds requirement against the total risk exposure amount; the SREP then assesses whether a given bank's own risk profile — concentration risk, interest rate risk in the banking book, model risk, governance weaknesses — is adequately covered. Where it is not, the supervisor sets a binding P2R to close the gap. Unlike Pillar 1, P2R is confidential to the bank and calibrated case by case.

P2R is binding: breaching it is a serious supervisory event and can trigger early intervention measures. It sits in the capital stack above the Pillar 1 requirement and below the combined buffer requirement. Because it is a hard requirement rather than a buffer, own funds used to meet P2R cannot simultaneously be counted towards the combined buffer requirement, nor towards MREL where the same instruments would otherwise double-count.

Stacking and the MDA interaction

The ordering of the stack matters for distributions. The combined buffer requirement sits on top of Pillar 1 plus P2R. If a bank's capital falls into the combined buffer, it breaches the maximum distributable amount (MDA) trigger and faces automatic restrictions on dividends, coupons on additional tier 1 instruments and variable remuneration. Because P2R sits below the buffer, raising P2R mechanically lifts the MDA trigger point, tightening the distance to distribution restrictions. Since CRD V, at least three quarters of P2R must be met with tier 1 capital and at least three quarters of that with common equity tier 1, limiting reliance on tier 2.

P2R is grounded in the supervisor's power to require additional own funds under CRD Art. 104(1)(a), with the dedicated additional own funds requirement framework in CRD Art. 104a. It is determined through the Supervisory Review and Evaluation Process under CRD Arts. 97–98. For banks under ECB direct supervision, the ECB sets P2R as part of its annual SREP decision.

Relevance for resolution and loss absorption

P2R is a going-concern requirement — capital meant to absorb losses while the bank continues to operate. It matters for resolution because the MREL calibration builds on the sum of own funds requirements: a bank's loss-absorption amount is typically anchored to Pillar 1 plus P2R, and its recapitalisation amount reflects the capital it would need to restore after resolution. A higher P2R therefore feeds through to a higher MREL requirement. Analysts reading a bank's capital disclosures should treat P2R as the bridge between the standardised Pillar 1 floor and the bank's true supervisory capital demand, and as an input to how much loss-absorbing capacity the resolution authority will ultimately require.