On 21 January 2025, the European Banking Authority (EBA) issued an opinion that sets out how Member State competent authorities (NCAs) should account in their Supervisory Review and Evaluation Process (SREP) for the application of Article 104a(6) of the Capital Requirements Directive IV (CRD IV) on 11 January 2026 to institutions bound by the output floor already on 1 January 2025.
The opinion:
- Explains how to operationalise the temporary cap of Article 104a(6)(a) of the CRD IV (temporary cap) that ensures that the Pillar 2 requirement (P2R) does not increase due to an institution becoming bound by the output floor, particularly by applying previously communicated P2R expressed in percentage terms on unfloored total risk exposure amount (TREA). In addition, it considers how to facilitate the supervisory review process of Article 104a(6)(b) of the CRD IV (review on double counting).
- Provides clarity on how NCAs examine, in the review on double counting possible double counting of risks already fully covered by the bindingness of the output floor. The EBA came to the view that, to eliminate double counting effects, supervisors should offset any potentially existing P2R add-on stemming from the “regulatory model deficiencies” category referred to in paragraph 386 of the EBA Guidelines on common procedures and methodologies for the SREP and supervisory stress testing under the CRD IV.
- Reflects on how in the review on double counting NCAs may need to consider arithmetic increases of the P2R due to the increase in TREA when an institution becomes bound by the output floor. This should be seen in the context of paragraph 361 of the SREP Guidelines, which clarifies that NCAs, when performing the SREP capital assessment, should determine and set the quantity (amount) and quality (composition) of the P2R, which is then communicated to institutions as a percentage of the TREA in accordance with paragraph 410.