Pillar 2 Add-on Guidance

Summary

This guidance from the Guernsey Financial Services Commission explains how the Pillar 2 add-on operates alongside Pillar 1 and the Capital Conservation Buffer under Guernsey's Basel III-consistent capital framework for banks. It sets out the Commission's expectations for how banks should calculate and present their Pillar 2 capital needs through the ICAAP and SREP processes.

• Capital structure: Total regulatory capital Risk Asset Ratio must be maintained at least at Pillar 1 (8% of RWA) plus Capital Conservation Buffer (2.5% of RWA) plus a Pillar 2 add-on, giving an overall minimum of at least 11% of RWA.
• Pillar 2 floor: The Commission sets a floor of 0.5% of RWA for the Pillar 2 add-on, though banks are generally expected to hold well above this minimum.
• ICAAP focus: While the ICAAP should review all risks and controls, the Pillar 2 charge should focus on the two or three key material risks that merit capital mitigation, assuming these risks persist even where controls are effective.
• Supervisory discretion: If the Commission considers that key controls have failed or are likely to fail, it may increase a bank's Pillar 2 charge until the matters are remedied.
• Capital Conservation Buffer: The CCB is clarified as an additional buffer to assist a bank in formal recovery mode, subject to agreement with the Commission, and is not intended to be drawn upon in normal circumstances.
• Board responsibility: Ultimate responsibility for identifying risks remains with the Board of Directors, and the ICAAP should be regularly updated to reflect changes in the business.
• Working Sheet: A Pillar 2 Working Sheet accompanies the guidance as a suggested format for presenting the Pillar 2 add-on calculation to the Commission; banks may use it or adopt their own equivalent format.

This is guidance rather than a binding rule change, but it sets clear supervisory expectations that banks should incorporate into their ICAAP submissions and capital planning.

Key obligations

• Banks must maintain a total regulatory capital Risk Asset Ratio of at least Pillar 1 (8% of RWA) plus the Capital Conservation Buffer (2.5% of RWA) plus a Pillar 2 add-on, totalling at least 11% of RWA.
• Banks must maintain a Pillar 2 add-on of at least 0.5% of RWA, as determined through the SREP.
• Banks must focus their ICAAP's Pillar 2 assessment on the two or three key material risks meriting capital mitigation.
• Banks must regularly update their ICAAP to reflect changes within the business.
• Banks should identify and present their capital needs to the Commission using the format expected in the ICAAP (and may use the accompanying Pillar 2 Working Sheet).

Applies to

banks