What the concept describes
The stacking order describes how a bank's capital, and in particular its common equity tier 1, is allocated across the layers of the capital framework in a defined priority. It answers a practical question that the separate definitions of each requirement do not: when a bank has a given amount of CET1, which requirement does it count towards first, and at what point does a shortfall bite. The order is set out in supervisory guidance from the EBA and, within the banking union, applied by the ECB.
The conventional sequence, from the bottom of the stack upward, is the Pillar 1 minimum own funds requirement, then the Pillar 2 requirement, then the combined buffer requirement, and finally Pillar 2 guidance at the top. CET1 is counted towards the lower, binding layers first; only capital in excess of the Pillar 1 and Pillar 2 requirements is available to meet the combined buffer, and only capital above the combined buffer counts towards Pillar 2 guidance.
How it works in practice
The stacking order matters most when capital is under pressure. Because CET1 fills the binding requirements first, a bank that loses capital depletes the top of the stack before the bottom. When CET1 falls such that it can no longer both meet the Pillar 1 and Pillar 2 requirements and fully cover the combined buffer, the combined buffer is treated as breached and the maximum distributable amount is engaged, automatically limiting dividends, additional tier 1 coupons and discretionary bonuses in proportion to the shortfall. Pillar 2 guidance, sitting above the combined buffer, is not a trigger for the maximum distributable amount; falling into it prompts supervisory dialogue rather than automatic restriction.
A parallel logic applies to resolution requirements. A shortfall against MREL can engage a separate maximum distributable amount for MREL, and the combined buffer is generally required on top of the risk-based MREL, so the same buffer capital that governs the ordinary maximum distributable amount also interacts with the MREL stack.
Legal basis
The stacking order is not codified in a single article; it is derived from the interaction of the CRR and CRD requirements and set out in EBA SREP guidelines and ECB supervisory practice. The relevant statutory pieces are the Pillar 1 requirement in the CRR, Article 92, the Pillar 2 requirement and Pillar 2 guidance in the CRD, Articles 104 and 104b, the combined buffer requirement in the CRD, Article 128, and the maximum distributable amount in the CRD, Article 141. The MREL-specific maximum distributable amount is in the BRRD, Article 16a.
Practical relevance for banks and investors
For banks, understanding the stacking order is essential to managing distribution capacity and to calibrating the CET1 buffer they wish to hold above the maximum distributable amount trigger. For investors, and especially additional tier 1 holders, the stacking order defines exactly how far CET1 must fall before coupons can be restricted, making it a central input into pricing coupon-cancellation risk and into comparing the resilience of different issuers.