Pillar 2 requirements (P2R) for euro area banks are less responsive to risks that are still building and have yet to materialise. Between 2019 and 2025, P2R are positively associated with weak asset quality and vary by size and business model, but not with exposure to population ageing, geoeconomic fragmentation, the climate transition, or non-bank finance. The Supervisory Review and Evaluation Process (SREP) was not designed to price slow-burning risks. No capital instrument matches their long horizon and uneven incidence across banks.
This document was provided by/ prepared for the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON).
