What the buffer is
The systemic risk buffer is a flexible macroprudential tool that competent or designated authorities may deploy to guard against long-term, non-cyclical systemic risks that the other capital requirements do not adequately capture. Where the countercyclical buffer addresses the credit cycle and the G-SII and O-SII buffers address the importance of individual institutions, the systemic risk buffer targets structural features of a banking system or of particular exposure classes.
It is set as a percentage of a defined base of risk-weighted exposures and must be met with common equity tier 1. Authorities can apply it broadly, to all institutions and all exposures, or in a targeted way, to a subset of institutions or to specific exposure segments such as a category of lending. This flexibility makes it the most adaptable component of the combined buffer requirement, and its calibration and scope vary considerably between jurisdictions.
How it works in practice
The systemic risk buffer is one of the building blocks of the combined buffer requirement, together with the capital conservation buffer, the countercyclical buffer and the buffers for globally and other systemically important institutions. The framework sets out how the systemic risk buffer interacts with the G-SII and O-SII buffers so that the requirements combine coherently rather than simply piling on without limit, and larger buffer settings are subject to notification, justification and, above certain levels, authorisation procedures.
As part of the combined buffer requirement, a breach of the systemic risk buffer restricts distributions through the maximum distributable amount. The CET1 used to satisfy it sits above the minimum own funds and Pillar 2 requirements and, like the other buffers, above a bank's resolution requirements; the same capital cannot count towards both the combined buffer and MREL.
Legal basis
The systemic risk buffer is provided for in the CRD, Articles 133 and 134. Article 133 allows authorities to introduce a systemic risk buffer of common equity tier 1 for the financial sector or one or more subsets of it, and sets the procedural and calibration framework, while Article 134 deals with the recognition of buffer rates set in other Member States. The buffer forms part of the combined buffer requirement under Article 128, and its breach engages the maximum distributable amount under Article 141.
Practical relevance for banks and investors
For banks, the systemic risk buffer can add materially to the CET1 that must be held, and because its scope can be targeted, its impact differs across business models and portfolios. For investors, the buffer affects the size of a bank's combined buffer requirement and therefore the distance to distribution restrictions; because national authorities calibrate it differently, comparing the systemic risk buffers applied to banks in different countries is part of a like-for-like assessment of capital headroom.