Pillar II Glossary

Pillar II Glossary

The Pillar II of the Basel Framework was explicitly designed for jurisdictional flexibility. As a result different Pillar II practices have developed.

A list of selected definitions is provided below:

• Capital Stack or Capital Hierarchy: the relationship between Pillar 2 capital expectations, Pillar 1 minimum capital requirements and Basel III buffers. This often has important implications for how automatic constraints on distributions are applied in various jurisdictions.
• Pillar 2A: risks to the bank that are either not captured or not fully captured under the Pillar 1 requirements of the Capital Requirements Regulation (CRR). Binding Pillar 2 capital expectations. These are publicly disclosed.
• Pillar 2 add-on or Pillar 2 charges: some jurisdictions use these terms in lieu of (or interchangeably with) “Pillar 2 capital expectations”, generally in circumstances where (through the Pillar 2 process) the supervisor requires the bank to hold additional capital so that sufficient capital is being held relative to the bank’s risks.
• Pillar 2B: risks to which the bank may become exposed over a forward-looking planning horizon (eg due to changes to the economic environment). Non-binding Pillar 2 capital expectations.
• Pillar 2 binding capital expectations: the level of capital set by supervisors that should be maintained at all times (legally binding, similar to Pillar 1 minimum capital requirements), whereby a breach would generally prompt a non-discretionary corrective action on the part of supervisors.
• Pillar 2 buffer: some jurisdictions use this term interchangeably with “Pillar 2 capital add-on” or “Pillar 2 capital expectations”. Similar to “Pillar 2 capital add-on”, it is generally used by supervisors whose Pillar 2 process results in banks being required to hold capital above the minima.
• Pillar 2 capital expectations: capital expectations in excess of Pillar 1 minimum capital requirements (including Basel III buffers) established through the supervisory review process.
• Pillar 2 guidance (P2G): Pillar 2 capital guidance is a supervisory tool setting non-legally binding Pillar 2 capital expectations at a level over and above overall capital requirements based on the supervisory review and evaluation process findings, in particular (i) an assessment of the adequacy of an institution’s own funds (quality and quantity), eg the ability to meet the applicable own funds requirements in stressed conditions; or (ii) supervisory concerns over the (excessive) sensitivity of an institution to scenarios assumed in supervisory stress testing. As P2G is positioned above the combined buffer requirement and is non-legally binding guidance, it is not relevant for the purpose of the calculations of maximum distributable amount.
• Pillar 2 non-binding capital expectations: all other capital expectations set by supervisors (non- egally binding). Bank capital targets, for example, would be considered non-binding.
• Pillar 2 requirements (P2R): binding capital requirements for risks underestimated or not covered by Pillar 1, which can have direct legal consequences for banks.