Elderlake Partners

08 · Supervision & Pillar 2

Art 73–110 CRD · EBA SREP GL · Pillar 3 ITS

Purpose & history

The pillar that fills the gaps

Pillar 1 is deliberately incomplete: it standardises what can be standardised and leaves the rest — concentration, IRRBB, business-model risk, governance quality — to supervisory judgement. Pillar 2 is where that judgement gets teeth: the SREP turns assessment into P2R (binding, MDA-relevant, in the stack) and P2G (an expectation sized off stress tests, sitting quietly above it). The design question that never closes is double counting: as Pillar 1 grows more comprehensive — the floor, the SMA — P2R add-ons priced for the same risks must shrink, and demonstrating that is a standing negotiation between bank and supervisor.

IRRBB is the exemplary Pillar 2 risk: real enough to destroy banks (2023's US regional failures were IRRBB events), yet so dependent on behavioural assumptions — deposit stickiness, prepayment — that Basel rejected a Pillar 1 charge in 2016 and built standardised outlier tests instead. Pillar 3 completes the triangle: disclosure as discipline, now centralised in the EBA data hub so the market can actually compare what banks publish.

The lineage

2004
Basel II invents the three pillars; Pillar 2 is a paragraph, not a process.
2014
SSM starts; EBA SREP guidelines turn judgement into methodology — scores, benchmarks, P2R.
2016
P2G born from the EBA stress test; BCBS IRRBB standard: SOT instead of Pillar 1.
2018
EBA IRRBB guidelines; ΔEVE 15%-of-T1 test hard-wired in CRD5.
2022–24
EBA IRRBB package: NII SOT added, standardised methodologies for weak internal systems.
2023
SVB et al.: unhedged duration plus flighty deposits — the SOT's scenario, realised.
2025 ff
CRD6 in SREP: ESG risks and transition plans enter the assessment; Pillar 3 data hub phases in.

Requirements

The annual machinery

ICAAP / ILAAPAnnual packages to supervisory standard: risk identification, quantification (normative + economic perspectives), capital planning under stress, liquidity adequacy — the SREP's raw material.
Stress-testing programmeInternal scenarios plus the EBA/SSM exercises; results wired into P2G and capital planning, not filed.
IRRBB measurementEVE and NII engines across the six/two scenarios; behavioural models for NMDs (5-year cap), prepayment and pipelines — assumptions documented, back-tested, and owned by ALCO.
SOT computation & responseQuarterly outlier tests; breaches trigger supervisory dialogue with a credible hedging or repricing plan ready.
Disclosure productionPillar 3 to ITS templates with controls equivalent to financial reporting; data-hub submission; consistency with FINREP/COREP reconciled.
Governance & ESG (CRD6)Fit-and-proper processes, transition plans with quantifiable ESG-risk targets — assessed in SREP from 2026.

Calculations

A bank's full CET1 requirement Pillar 1 CET1 = 4.5%
P2R = 2.0% → CET1 share 56.25% = 1.125%
CCoB = 2.5% · CCyB = 1.0% · O-SII = 2.0%
CET1 requirement = 11.125% of floored TREA
P2G ≈ 1.5% expected on top — not MDA-relevant, but ignored at your peril.
What the floor does to the tower Same stack, TREA €60bn → €72.5bn (floor at 72.5%): the 11.125% requirement grows from €6.7bn to €8.1bn of CET1 — every layer scales, which is the single-stack point.
IRRBB SOT — in euros Tier 1 = €10bn
EVE outlier: ΔEVE > 15% × 10 = €1.5bn under any of six scenarios
NII outlier: ΔNII > 5% × 10 = €0.5bn over one year, parallel ±
A long-duration mortgage book funded by short deposits walks straight at the EVE test — hence the Dutch swap programmes.
MDA interaction At CET1 = 10.4% vs 11.125% required: in the CBR → distributions capped (see 01 · detail). P2G breach alone triggers no MDA — only conversation.

Changes & sources

What CRD6 / CRR3 changed here

AreaChange
SREP scopeESG risks and transition plans enter the methodology; supervisory powers extended
Pillar 3Centralised EBA data hub; floor-split disclosure (U-TREA vs S-TREA); ESG templates
PerimeterThird-country branch regime harmonised (CRD6)

Where the law lives

Art 73–110 CRD; EBA SREP GL (2022 revision); EBA IRRBB GL + RTS on the SOT and standardised methodology; Pillar 3 ITS. P2R/P2G decisions are bank-specific administrative acts — the law's last mile is your SREP letter.

Open items

  • Buffer usability and the CCyB-positive-neutral debate — the macroprudential review continues.
  • ESG in Pillar 1 vs Pillar 2 — the EBA's answer so far: Pillar 2 and disclosure, not risk weights.
  • Data-hub phasing for smaller institutions.

Independent analysis by Elderlake Partners, as at August 2026. Not legal, accounting or supervisory advice.