European Banks SREP Requirements for Next Year
5 December 2016 by Felipe Villarroel
Over the last few days several European banks have reported their Supervisory Review and Evaluation Process (SREP) capital requirements for 2017.
Carried out by the ECB, one of the main outputs is the annual minimum capital requirements for each bank under its jurisdiction. As we mentioned some months ago (Subtly Does it by the ECB), SREP capital requirements for 2017 are trending lower than previously expected. Earlier this year the ECB split the Pillar 2 requirements into P2R (Recommended) and P2G (Guidance) with only the former included in the calculation of a bank’s ‘maximum distribution amount’ (MDA) threshold rate. In addition local regulators are able to choose whether to phase in the Capital Conservation Buffer over a period to January 2019, or apply the full 2.5% with immediate effect.
As a consequence, the minimum Common Equity Tier 1 required to sit below the MDA threshold levels for 2017 include: 4.5% Pillar 1 requirement (unchanged), a lower Pillar 2 requirement (i.e. P2R only), a lower Capital Conservation Buffer and a Systemic Risk buffer (unchanged). The Counter Cyclical buffer is set by individual regulators which is currently set at 0%, except for a couple of EU countries. These announcements increased the distance between required and actual capital levels therefore making it less likely that AT1 coupons are turned off.
Last week we learned that the BKIR and AIB’s SREP requirements will be 8% and 9% respectively for 2017. A number of key Spanish lenders also stated their numbers with BBVA, Bankia, Sadabell, Popular, and Caixa Bank all reporting slightly lower SREP requirements in the mid-to-high 7% range. All of these came at the lower end of expectations and include sizeable declines in the Pillar 2 requirements (now P2R) for next year compared to last year as well as the phase in of the Capital Conservation Buffer. We will monitor the rest of the banking space’s SREP numbers in coming weeks but the announcements to date are supporting news for AT1 securities. Although market participants already knew about the reduction in capital requirements, having the actual numbers reduces uncertainty and allows for a more accurate calculation of the distance to trigger a coupon suspension for AT1 securities.
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