Bank : Update on Pillar 1 and Pillar 2 capital requirements for Europe’s top banks

After most banks published their SREP requirements in December, we are updating the 2017 capital requirements of around 30 European banks. - >Conservation buffers have increased, in line with their phase-in period, to 1.25%. Systemic surcharges on some banks have also risen. Counter-cyclical buffers remain at zero overall but have risen in Sweden, Norway, Slovakia and the Czech Republic. - The surcharge under this Pillar 2 requirement will have been one of the key subjects discussed by regulators in 2016, following the EBA’s January 2016 recommendation to incorporate it in mandatory requirements (and hence in decisions about coupon and dividend payments), until the European Commission’s official announcement in November 2016 that it will be split into two parts in 2017. The Pillar 2 therefore comprises a mandatory component (P2R – Required) and a Guidance component (P2G - Guidance). Given that only the first component is officially published by banks, it is the only one we can factor into our estimates. It averages 1.84% for our panel. - We have found an average improvement of 100bp in the distance to CET1 requirements for 2017, up from 370bp to 470bp, despite higher conservation buffers (+0.625%) and systemic buffers. Including gaps on AT1 and Tier 2 instruments, to be filled with CET1 capital, the distance rises from 370bp in 2016 to 390bp in 2017. This also demonstrates that there is more room for manoeuvre in 2017. - While distances to these 2017 requirements appear far more comfortable than the 2016 distances thanks to the split of the Pillar 2, some banks will still have to boost their core Tier 1 capital before 2019. And all banks will have to offset the impacts of IFRS 9 (-59bp on average on CET1, with a phase-in period from 2018 to 2022) and the review of RWA.