FI’s approach to assess suitable level of own funds in Swedish banks (Pillar 2 guidance)

FI has decided on a general approach to assess the size of a bank’s so-called Pillar 2 guidance. The approach is based on a two-step assessment that starts with a sensitivity-based stress test.

As part of the implementation of the EU's new capital adequacy regulations in Sweden, FI may establish a Pillar 2 guidance for each bank subject to the CRR.

FI must assess a suitable level for each bank's own funds to cover risks and manage future stressed situations. This coverage applies in addition to the existing coverage from the minimum requirements, the additional own funds requirements, and the combined buffer requirement, or the requirement on a leverage ratio buffer. If we determine that a bank needs more capital, we will communicate this to the bank via the Pillar 2 guidance.

On 15 February, FI submitted a memorandum on the Pillar 2 guidance for consultation. We have considered the submitted responses in the decision memorandum that is being published now.

Stress test as starting point

FI will use a stress test to assess how much capital will be communicated to the bank in the guidance. FI may also include other components in the guidance. In this memorandum, we describe in this memorandum the general approach that we will apply to assess the Pillar 2 guidance. The approach extends the information published by FI in November 2020 in its memorandum "New capital requirements for Swedish banks".

Two-step approach

In the first step, we conduct a sensitivity-based stress test that estimates how much the bank's capital ratio would be impacted from a number of assumptions and methodology choices. The outcome from the stress test will be rounded off into buckets. In the second step, we then take other quantitative and qualitative aspects into consideration. The final Pillar 2 guidance will be determined based on an overall assessment.

Probable outcome

In line with FI's previous communication, we make the assessment that the guidance for most banks will amount to 1.0–1.5 per cent of their risk-weighted assets and 0.2–0.5 per cent of their leverage ratio exposure amount. However, the guidance for some banks may deviate from this.

Entry into force and application

FI will apply the new approach starting with this year's supervisory review and evaluation process. The firms that are affected are those subject to the Credit Institutions and Securities Companies (Special Supervision) Act (2014:968).