Stacking orders and capital buffers : reflections on management buffer practices in the EU, 15 July 2024

In the EBA's response to the European Commission's Call for Advice on the review of the macroprudential framework, it was highlighted that the implementation of the CRR2, CRD5 and BRRD2 frameworks is very recent and has introduced several new elements. This includes elements such as the minimum leverage ratio (LR) requirement and requirements for own funds and eligible liabilities (MREL) which have been fully phased-in since 2024. In addition, the SREP Guidelines expanded on the roles for competent authorities in the setting of Pillar 2 requirements and guidance, and for the risk of excessive leverage. The EBA's response explained that a more comprehensive evaluation should be performed before considering further substantial changes to the current framework. Against this backdrop, the EBA performed a broad analysis of the stacking order of requirements for own funds and eligible liabilities applicable to banks, with a focus on microprudential elements. More specifically, while the EBA is not promoting any suggestion for changes in a framework still recently implemented, the work conducted on stacking orders aimed at better understanding the interactions between the regulatory stacks and in relation to which stacks management buffers are usually set by banks. For this purpose, the report describes all regulatory stacks, i.e. going and gone concern stacks, that are relevant for understanding a bank's capital headroom above the requirements. Section 2 presents an overview of the EU framework and its various stacks of requirements including some high-level and summarised comparison with those of the UK and US. Section 3 examines the institutions' practices on management buffers reflecting upon an EBA dedicated survey and the EBA roundtable meeting held on 23 October 2023 with institutions.