EBA reflects on EU stacking orders and provides insight into EU institutions’ management buffers

The European Banking Authority (EBA) today published a Report on the stacking orders of capital, leverage and MREL/TLAC requirements and related capital buffers, as well as on reflections about management buffers practices in the European Union (EU). The Report describes the role of regulatory stacks, both going and gone concern, with a focus on micro-prudential elements. It also summarises the differences between the EU, the UK and US frameworks. The Report highlights institutions’ practices on management buffers. Further work of the EBA will include efforts to continue to clarify, where necessary, the interaction between the different stacks.

The work conducted on stacking orders aims at better understanding the interaction between the regulatory stacks and in relation to which stacks management buffers are usually set by institutions. The Report describes all regulatory stacks that are relevant for understanding an institution’s capital headroom above the requirements. It also presents a high-level overview of the EU framework of currently applicable regulation, together with a description of some other non-EU frameworks.

The analysis of institutions’ practices on management buffers highlights that many institutions do not have a very clear definition of management buffers, but nearly all of them set a target on the basis of at least one stack. Institutions tend to compare the management buffer to the highest reference point in the relevant regulatory stack on which they have defined a management buffer.

Most institutions set a management buffer target based on the risk-based CET1 ratio. For this ratio, as of December 2022, the management buffer target was on average 2.4 percentage points above the Pillar 2 Guidance (P2G). Many institutions also set targets based on the risk-based Tier 1 and Total capital ratios, the leverage ratio, and the risk-based MREL ratio.

A broad set of factors influence the determination of management buffers. Internal considerations include the ability to manage unexpected risks and to develop strategic and business opportunities. External considerations include expectations from supervisors and regulators or from other stakeholders. In terms of perceived usability of management buffers, most institutions considered management buffers to be more usable than the capital held to meet the Combined Buffer Requirement (CBR).

Next steps

The work will inform other EBA regulatory products, such as the one stemming from the mandate on the interplay between the output floor and Pillar 2 (Art 104a(7) CRD6), and prepare the ground for the update of the supervisory review and evaluation process (SREP) Guidelines following the EU Banking Package (CRR3 and CRD6) implementation.

Legal basis and background

Under the current EU framework, an institution may be subject to up to ten different stacks resulting from requirements or expectations in terms of own funds and eligible liabilities:  three own funds ratios, the leverage ratio and the ratios for Total Loss Absorbing Capacity (TLAC), Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and subordinated MREL stacks, considering that each TLAC and MREL stack has a risk-based and leverage-based version.

In its response to the European Commission’s Call for Advice on the review of the macroprudential framework, the EBA explained that a more comprehensive evaluation should be performed before considering further substantial changes to the framework.