Guidance Note: Pillar 2 in Jersey

Summary

This is a JFSC guidance note explaining how Pillar 2 of the Basel II/III capital framework applies to Jersey incorporated deposit takers (JIBs). It sets out the JFSC's expectations for the Internal Capital Adequacy and Liquidity Assessment Process (ICAAP) and the related Supervisory Review and Evaluation Process (SREP), including how the JFSC assesses risks not fully captured under Pillar 1 and may impose a Pillar 2 capital buffer.

• ICAAP: JIBs are expected to produce and maintain an ICAAP document recording their assessment of capital and liquidity adequacy, key risks, mitigants and any resulting additional capital needs, following a suggested format set out in Appendix A.
• Risk coverage: Guidance covers specific risk areas JIBs must consider, including credit, market and operational risk underestimation, concentration risk, counterparty credit risk, ratings migration risk, parent/group exposure, structural foreign exchange risk, asset price risk, liquidity risk (including LCR/LMR), intraday and long-term liquidity risk, interest rate risk in the banking book, pension, strategic, reputational and regulatory risk.
• Stress and reverse stress testing: JIBs are expected to carry out stress testing and reverse stress testing, and to maintain recovery plans with defined recovery triggers and management actions, as described in Appendices B to E.
• Liquidity and HQLA assessment: Guidance on assessing High Quality Liquid Asset (HQLA) eligibility, LCR/LMR adjustments and historical data analysis is provided in Appendices F to J.
• Advanced Approaches: JIBs must obtain prior JFSC approval before using any Advanced Approach (e.g. Internal Ratings Based, Advanced Measurement, or Internal Models Approaches) to calculate Pillar 1 capital requirements.
• SREP: The JFSC reviews each JIB's ICAAP through its SREP and may set a Pillar 2 buffer above the standard Capital Conservation Buffer; breaching the resulting Capital Buffer triggers a notification requirement to the JFSC.

The guidance is informational/interpretive rather than a standalone rule with fixed statutory deadlines; it explains how existing Banking Code and Prudential Return requirements interact with Pillar 2 expectations. No new commencement or transition dates are specified in this version, which was last revised 1 January 2025.

Key obligations

• JIBs must prepare and maintain an ICAAP document assessing capital adequacy, liquidity adequacy, key risks and mitigants, and any resulting additional capital requirement.
• JIBs must obtain prior JFSC approval before using any Advanced Approach (Advanced Measurement, Internal Ratings Based, or Internal Models Approaches) for Pillar 1 capital calculations.
• JIBs must conduct stress testing, including reverse stress testing, and maintain recovery plans with defined recovery triggers and management actions.
• JIBs must assess and monitor specific risk categories (credit, market, operational, concentration, counterparty credit, structural FX, liquidity/LCR-LMR, intraday liquidity, interest rate risk in the banking book, pension, strategic, reputational, parent, and regulatory risk) as part of their ICAAP.
• JIBs must notify the JFSC if their capital ratios fall below the Capital Buffer (Capital Conservation Buffer plus any Pillar 2 buffer set by the JFSC).
• JIBs should maintain a Liquidity Contingency Plan and assess HQLA eligibility and LCR/LMR adjustments in line with the guidance in the appendices.

Applies to

Jersey incorporated deposit takers (JIBs)